Vanguard Investments v. Central Cal. Fed. Sav. & Loan Assn.

• Citation: 68 Cal.App.3d 950,137 Cal.Rptr. 719
• Parties: VANGUARD INVESTMENTS, a California limited partnership, on its own behalf and on behalf of all persons similarly situated, Plaintiffs and Respondents, Cross-Appellants, v. CENTRAL CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, and Does 1 through 20, Defendant and Appellant, Cross-Respondent. Civ. 15363.
• Decision Date: 10 March 1977
• Court: California Court of Appeals

Page 719

137 Cal.Rptr. 719

68 Cal.App.3d 950

VANGUARD INVESTMENTS, a California limited partnership, on its own behalf and on behalf of all persons similarly situated, Plaintiffs and Respondents, Cross-Appellants, v. CENTRAL CALIFORNIA FEDERAL SAVINGS AND LOAN ASSOCIATION, and Does 1 through 20, Defendant and Appellant, Cross-Respondent.

Civ. 15363.

Court of Appeal, Third District, California.

March 10, 1977.

As Modified April 8, 1977.

Miller, Starr & Regalia, Oakland, for plaintiffs and respondents, cross-appellants.

Angell, Adams & Holmes, San Francisco, Purtell & Hoppin, Woodland, for defendant and appellant, cross-respondent.

REGAN, Associate Justice.

Plaintiff Vanguard Investments, a California limited partnership, filed suit on its own behalf and on behalf of all persons similarly situated against the defendant Central California Federal Savings and Loan Association for declaratory relief and damages arising out of the defendant's use of variable interest rate mortgages. After the introduction of documentary evidence, the plaintiff moved for a partial summary judgment. Thereafter, defendant filed its cross-motion for summary judgment. The trial court granted parts of both motions and entered judgment.

On March 22, 1965, plaintiff entered into an assumption agreement with defendant and its borrower whereby plaintiff assumed an indebtedness evidenced by a promissory note in the face amount of $400,000. This note contained a variable interest rate clause which provided:

'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.' ¹

Pursuant to this provision, defendant notified plaintiff on June 30, 1966, that the interest rate on the note was being increased from six and one-half percent to seven percent, effective November 1, 1966, and that plaintiff's monthly interest charge would be increased accordingly. ² Plaintiff made no objection to the increased monthly interest charge and has continuously paid the increased monthly installments due on the promissory note since November 1, 1966. Each of the various class members in this action who were borrowers at the time was given notice of a similar increase at or about the same time. ³

On May 11, 1970, defendant notified plaintiff that pursuant to the variable interest provision the interest rate would be increased from seven to eight percent beginning September 1, 1970, and the plaintiff's monthly interest charge would be increased accordingly. ⁴ Plaintiff made no objection to this increase. Each of the various class members was given similar notice.

On April 15, 1971, plaintiff requested an explanation from defendant of the increase in interest rates on its loan. Plaintiff requested that it be furnished with the factual data supporting the validity of the increase. In its letter the plaintiff noted that the rate of interest on its note had been increased by defendant from six and one-half percent to eight percent. The letter then states: 'What the (variable interest) clause implies is that the rate you now pay on savings has gone up 1 1/2%.'

Defendant replied to this letter by advising plaintiff that the interest increases were based upon increases in rates paid to its savings members and that the defendant had found it necessary to raise the interest rates of its borrowers in order to reestablish a reasonable relationship between the cost of money to the defendant and the price charged by it for loans. ⁵

It appears to be undisputed that during the time periods in question the earning or dividend rate paid on all savings accounts had been increased by defendant over that in effect at the time of the loan to plaintiff. These figures reflect that at the time of the execution of the loan in question during the first quarter of 1964 the rate was 4.73 percent. In the third quarter of 1966, when the variable interest provision was first invoked, the rate had increased to 5.19 percent, and in the third quarter of 1970, when the variable interest provision was again invoked, the rate had increased to 5.42 percent. From 1964 to 1966 the basic passbook rate increased from 4.85 percent to 5.25 percent. The increase in the dividend or earning rate in 1970 apparently resulted from savings being placed in higher earning certificate accounts and not from an increase in the basic passbook rate.

On August 19, 1971, plaintiff filed a complaint seeking 'a declaration that the interest increases exacted by defendant were and are excessive and for a declaration that the promissory note authorizes an interest increase only by the amount of increase in the dividend rate paid by defendant on its basic passbook savings accounts . . .' On November 13, 1972, plaintiff amended its complaint by filing a class action wherein plaintiff brought suit on behalf of itself and all of defendant's borrowers whose interest rates were increased by defendant in 1966 and 1970.

The pretrial order of September 17, 1974, described the nature of the case: 'This is a class action brought by plaintiff to recover all or part of the additional interest paid to the defendant by the class members as a result of the defendant's increase of the interest rates on its loans under a variable interest rate clause. The plaintiff is seeking for itself and each class member a declaratory judgment that the interest rate increases were illegal or excessive, damages for the excess interest paid, and punitive damages for fraudulent misrepresentation.'

On November 25, 1974, plaintiff made a motion for a partial summary judgment on the ground that defendant acted wrongfully in increasing the interest rate on its loan because: (1) the variable interest rate clauses in the loans were illegal; (2) the increase of interest in 1966 exceeded the allowable rate under the notes; and (3) the 1970 increases were not authorized by language in the notes.

On December 10, 1974, defendant made a cross-motion for summary judgment on the grounds that (1) the variable interest rate clauses were legal; and (2) the increases were within the terms of the promissory notes as signed.

On January 24, 1975, the trial court rendered its opinion and decision holding that the variable interest provision was legal and enforceable and did not require the interest increase to equal the increase in the dividend or earnings rate paid on savings by defendant. After deciding in favor of the defendant on these points, however, the court found for the plaintiff with regard to the validity of the 1970 increase and held it to be void as not coming within the terms of the agreement.

Following this decision, the defendant moved the court to reconsider its determination on summary judgment because the issue found adversely to defendant was based either on factual conclusions wholly unsupported by the record and contrary to the undisputed testimony of the defendant regarding the meaning of the variable interest provision or on a disputed fact which could not support a decision for summary judgment. In particular the defendant asked for reconsideration of that part of the court's decision which held that the variable interest provision refers only to the types of savings accounts existing at the time of execution of the promissory note of plaintiff. In addition, the defendant asked the court to clarify the class aspects of its decision in that the opinion was silent regarding its application to the class of plaintiffs and failed to consider differences in the positions of various class members.

The trial court granted the defendant's motion and on April 4, 1975, issued its reconsidered and corrected opinion on decision. This opinion is substantially identical to the original decision of the court. ⁶ The language of the trial court with regard to the plaintiff's understanding of the meaning of the variable interest provision was redrafted to read as follows:

'At the time these promissory notes were executed defendant had at least two types of savings plans for its customers: a regular passbook savings account, and a 'full-paid certificate account'. The interest to be paid on these accounts was at the relevant time the same, and was determined by the defendant. Neither party has come forward with an explanation or description of what a 'full-paid certificate' savings plan is or was. The only reasonable inference that can be drawn is that under the language of the agreement plaintiff believed that the variability of the interest he was to pay on his loan would be based on the dividend rate paid by defendant on the type of accounts Then existing, and not on various types of accounts and plans to be instituted in the future. In other words, the interest paid by plaintiff could vary up or down in relation to the upward or downward variance of the interest defendant paid out on its savings accounts. Defendant's contention that the variance of plaintiff's interest should be based on the present day total of some twelve types of savings plans is not in accord with the terms of the contract.' ⁷

On April 4, 1975, the trial court entered its order for summary judgment. The defendant's cross-motion for summary judgment was granted in the following particulars:

'1. The variable interest rate clause contained in the defendant's promissory notes was not illegal when the notes were executed.

'2. Under the variable interest rate clause in the defendant's promissory notes, if the defendant can show an increase or decrease in the dividend...