Unpublished Disposition, 860 F.2d 1088 (9th Cir. 1985)

MEMORANDUM^* 

OVERVIEW

Capital Growth Incorporated (CGI) appeals the grant of summary judgment in favor of American Savings & Loan Association and the Federal Home Loan Mortgage Corporation (FHLMC) on CGI's suit for breach of contract and slander of title. We affirm.

DISCUSSION

CGI contends American's insistence that CGI pay the prepayment penalty was a breach of contract because time was not of the essence in this contract and CGI was prepared to pay the loan within a short time after the ninety day penalty-free period ended.

Each of the cases cited by CGI for the proposition that time is ordinarily not "of the essence" of a contract required the court to decide whether or not a contract should be enforced despite the failure of one of the parties to adhere to the time for performance provided in the contract. These cases do not support CGI's contention that American breached the contract by refusing to waive the prepayment penalty. Our research revealed no case in which a California court held a defendant liable for breach of contract because the defendant insisted on performance as provided in the contract (unless the defendant had waived the right to insist on the time provided in the contract).

Furthermore, there is a line of California cases which provides that where the contract gives the parties the right to terminate the agreement if the escrow does not close by a certain date, that right to terminate is absolute. See Fogarty v. Saathoff, 128 Cal. App. 3d 780, 787, 180 Cal. Rptr. 484, 488 (1982); Moss v. Minor Properties, Inc., 262 Cal. App. 2d 847, 853, 69 Cal. Rptr. 341, 345 (1968); Leiter v. Handelsman, 125 Cal. App. 2d 243, 251, 270 P.2d 563, 567-68 (1954). The Leiter court reasoned:

The right to make written demand for return of the money or instruments was an integral, clear and unequivocal clause in the instructions. Even if time was not of the essence, and even if it could be found that there had been a waiver of the precise time of performance, nowhere has it been suggested in the evidence or in argument that respondents waived their right to make written demand for return of their money after the 30-day escrow period concluded. Were they to be denied that right, the court in effect would be altering the express terms of the contract. Neither a trial nor appellate court has the power to rewrite a contract.

125 Cal. App. 2d at 251, 270 P.2d at 567-68.

It is clear under California law that even if the "time is of the essence" clause in the trust deed did not apply to this contract, American did not breach the contract by insisting that CGI perform according to its terms. Furthermore, the "time is of the essence" clause did apply to the prepayment provision.

CGI argues that the "time is of the essence" clause in the trust deed did not apply to the prepayment provision for two reasons: First, it contends that a trust deed is a "mere incident" to the underlying agreement (the note) and its terms do not govern the agreement. Second, it contends that the prepayment provision was not an "obligation" and that therefore the "time is of the essence clause" by its terms was inapplicable.

A note and a trust deed, when part of one transaction, are treated as one contract. See, e.g., Kerivan v. Title Ins. & Trust Co., 147 Cal. App. 3d 225, 230, 195 Cal. Rptr. 53, 56 (1983). Since it is undisputed that the note and trust deed here were part of one transaction, the "time is of the essence" clause in the deed of trust applied to CGI's obligations under the note.

CGI was obligated, if it chose to prepay the loan, to either pay within the penalty-free period or pay the penalty. This "obligation" was thus subject to the "time is of the essence" clause, and American's refusal to waive the prepayment penalty was proper.

Even if the "time is of the essence" clause did not apply to the prepayment provision, time was of the essence of this provision because it was an option.

In an option contract, time is "of the essence" even if the contract does not say so. See, e.g., Hendren v. Yonash, 243 Cal. App. 2d 672, 679, 52 Cal. Rptr. 738, 745 (1966). An option is simply a continuing offer. Black's Law Dictionary 986 (5th ed. 1979).

The provision in question was an irrevocable offer, good for ninety days after the date of notification of an interest rate increase, allowing CGI to prepay the loan and release itself from further liability under the contract without paying the prepayment penalty. Thus, it qualified as an option, and time was of the essence.

CGI contends that the clause is unconscionable and should not be enforced. The determination of unconscionability is made in light of circumstances in existence at the time the contract was made, and a court may use evidence of the commercial setting of the contract in making this determination. Cal.Civ.Code Sec. 1670.5 & Legislative Committee Comment (West 1985).

Of the circumstances CGI contends make this clause unconscionable, only three were in existence at the time the contract was made: first, the date of notice is the date of mailing, not when it is received; second, the provision was "hidden away in a provision entitled 'Waiver of Statute of Limitations' "; and third, it applied only to the trustor and not to American.

In light of the following circumstances, the clause appears reasonable: after receiving notice, even allowing a week for mailing, the borrower would have eighty-three days in which to act on it; Mr. Cordes, a real estate broker and general partner of CGI, read the provision when CGI took the property subject to the deed of trust; and CGI purchased the property as an investment, thus the setting was commercial.

Furthermore, the result in this case would be the same whether the clause was a part of the contract or not: unless American waived the ninety day deadline, it was entitled to the prepayment penalty. The time is of the essence clause is not unconscionable.

CGI argues that because American accepted several late payments without demanding the late charge available under a different provision of the contract, American waived its right to adhere strictly to the ninety day deadline.

Whether a waiver had occurred is a question of fact. Leiter, 125 Cal. App. 2d at 248, 270 P.2d at 566. To withstand the motion for summary judgment on this issue, CGI would have to produce specific facts sufficient to show that there is a genuine issue whether American waived the ninety day deadline. See Fed. R. Civ. P. 56. To establish that American had waived the ninety day deadline for penalty-free prepayment, CGI would have to show that American spoke or acted in a way that justified CGI in believing that American would extend the deadline, and that CGI had detrimentally relied on this belief. See Sosin v. Richardson, 210 Cal. App. 2d 258, 26 Cal. Rptr. 610, 613 (1962); B. Witkin, Summary of California Law, Contracts Sec. 769 (9th ed. 1987).

The only evidence that CGI has introduced on this issue relates to waiver of the late charge on CGI's monthly payments, and is not relevant to a waiver of the prepayment penalty provision. Even if American's acceptance of late payments were sufficient to justify a belief that the ninety day deadline would be waived, CGI has produced no facts establishing [nor does it seem to contend] that it detrimentally relied on any waiver when it allowed the ninety day deadline to pass. Instead, CGI admits that "Capital Growth's General Partner, Ron Cordes, believed that Capital Growth had until early June to pay off the loan without penalty. [citations] Capital Growth Investors learned of the date that American was claiming was the last day to make payment without penalty only after that date had passed." Thus, CGI allowed the ninety days to pass without paying off the loan because its general partner had failed to calculate the deadline, not because American had led it to believe it would not require strict adherence to the ninety day deadline.

Because CGI offered no evidence that American engaged in conduct which would justify a belief that it would waive the deadline, and because CGI offered no evidence of detrimental reliance, it has not shown that there is a genuine issue of material fact regarding this issue.

CGI argues that because its slight delay in prepaying the loan resulted in it paying a costly prepayment penalty, it has incurred a forfeiture and is entitled to relief under California Civil Code section 3275.

In Lazzareschi Inv. Co. v. San Francisco Fed. S. & L. Assoc., 22 Cal. App. 3d 303, 308, 99 Cal. Rptr. 417, 420 (1971), the court held that a prepayment penalty identical to the one here, but without a provision for penalty-free prepayment within a certain time, was an option not involving forfeiture for a default under section 3275. CGI argues that because here there is a provision for penalty-free prepayment which CGI barely missed, section 3275 applies. Since this provision was more favorable to the borrower than the one upheld in Lazzareschi, the prepayment penalty was not a forfeiture under section 3275.

CGI seems to argue that the provision is invalid as a liquidated damages clause constituting a penalty (although it cites the forfeiture provision, Cal.Civ.Code Sec. 3275, discussed above).

Under Lazzareschi and other California cases a loan provision such as this which gives the borrower an option to prepay the loan upon payment of a penalty is not a liquidated damages provision, and not a penalty. See 22 Cal. App. 3d at 308, 99 Cal. Rptr. at 420. The fact that it gives the borrower an additional option to prepay the loan within a certain time period and avoid the penalty does not convert it into an invalid liquidated damages clause.

CGI states that the envelope containing the notice, although correctly addressed to CGI, incorrectly indicated "c/o Harry Parks Realty," and there is no evidence a third party who was personally liable on the note was notified. Based on these allegations it argues that American was not entitled to adhere to the ninety day deadline.

We disagree. Under California law, requirement of technical compliance with the ninety day prepayment provision is consistent with a requirement of only substantial compliance with the notice provision, given the purposes each provision serves.

The penalty-free prepayment option is a valuable right. Allowing CGI longer than ninety days to exercise the option would give CGI "not the option [CGI] bargained for, but a longer and therefore more extensive option." Holiday Inns of America, Inc. v. Knight, 70 Cal. 2d 327, 330, 74 Cal. Rptr. 722, 724 (1969); Simons v. Young, 93 Cal. App. 3d 161, 184, 155 Cal. Rptr. 460, 469 (1979). Furthermore, strict compliance with the ninety day provision is important because a less strict requirement would inevitably lead to disputes over when the time for penalty-free prepayment expired.

The notice provision, on the other hand, serves to give both parties a certain date from which the ninety day period runs and to give the recipient time to arrange financing to take advantage of the prepayment provision. As long as the notice is received without substantial delay, these purposes are served.

Where the purposes of the notice requirement are met and a party who receives actual notice is not prejudiced by a technical defect, the defect should not defeat the sender's rights. See generally, Industrial Asphalt, Inc. v. Garrett Corp., 180 Cal. App. 3d 1001, 1009-10; 226 Cal. Rptr. 17, 22 (1986) (validating subcontractor's mechanics' lien against owner who received notice even though subcontractor failed to comply with statutory requirement of sending notice to contractor).

CGI has produced no evidence that American failed to notify any third party as required by the contract, nor that any such failure of notification affected its payment of the loan. Thus, CGI has failed to produce evidence sufficient to raise a genuine issue of material fact regarding American's failure to comply with the third party notice requirement.

Even if there were sufficient evidence to raise an issue of fact regarding defective notice, CGI admits it received notice on March 6th which was three working days after the notice was mailed. CGI does not offer any evidence that if the correct name had been on the notice it would have received the notice earlier, not that it would have paid the loan within the ninety day period.

We hold that, in the absence of any evidence that the error in addressing the notice substantially delayed its delivery to CGI, no triable issue was presented.

CGI contends that American miscalculated the date of the ninety day deadline in its demand to Home Savings, and that there is a genuine issue of fact whether CGI would have paid off the loan within the ninety day period if the demand had been correct.

The date the notice was given was February 28, 1985. The note provided for penalty-free prepayment within ninety days of the date of notice. Words of a contract should be interpreted in their usual and ordinary sense. Cal.Civ.Code Sec. 1644 (West 1985). Ordinarily when a time period is computed the first day is not included. See generally Cal.Civ.Code Sec. 10 (West 1982). Thus, CGI's interpretation is correct: the period expired May 29th. The demand, which stated that the period expired May 28th, was incorrect.

CGI, however, has not produced any evidence that would tend to establish that, had the demand been correct, someone at Home Savings would have reminded CGI that the period was about to expire. The only evidence cited by CGI concerns the Home Savings employee who worked on the file, Mr. Torres. He testified that he couldn't remember whether he first looked at the file on the 29th (when there was a possibility that he could have reminded CGI about the deadline if the date had been correct) or on the 30th (when it was too late), but that at any rate he did not consider it his responsibility to remind CGI of the deadline. CGI argues that Mr. Torres was evasive, uncertain, and biased.

A party cannot defeat a motion for summary judgment simply by discrediting evidence which supports the motion. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Assoc., 809 F.2d 626, 630 (9th Cir. 1987). It must produce some "significant probative evidence tending to support the complaint." Id. (quoting First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 290 (1968)).

CGI has not produced any evidence that if the demand had been correct Mr. Torres would have told CGI of the deadline in time for the loan to be prepaid. Furthermore, it has produced no evidence that it would have been able to pay off the loan on May 29th even if Mr. Torres had notified CGI. Thus, CGI has not shown that there is a genuine issue of material fact.

CGI contends that American's demand to Home Savings contained an untrue statement which caused Home Savings to "not close the refinance loan" and that American is therefore liable for damages for slander of title.

CGI's argument is based on the contention that American falsely claimed it was entitled to the prepayment penalty. Since American was entitled to the prepayment penalty, this was not a false statement. Thus there is no evidence supporting the slander of title claim.

CGI contends that because American assigned the mortgage to the FHLMC, the FHLMC is also liable for breach of contract. It is not necessary to resolve this question because there is no genuine issue of material fact regarding the alleged breach of contract underlying the claim against the FHLMC. Therefore both American and the FHLMC were entitled to summary judgment.

AFFIRMED.

REINHARDT, Circuit Judge, dissenting:

I dissent. The notice was improperly addressed. Accordingly, in my opinion, it was not effective until received. If a sender wishes to take advantage of a contractual provision that starts the notice period running upon mailing, the letter must be addressed in the manner required by the contract or otherwise agreed to by the parties. Here the notice was not received until the 6th of June. The majority's speculation as to when the notice would have arrived had it been properly addressed is just that--pure speculation. Summary judgment requires more. Furthermore, I do not read the record as my colleagues do. I believe Capital Growth raised a genuine material issue regarding the prejudicial effect of improperly treating the date of mailing as the date of notice. Capital Growth's contention, which is sufficiently established for summary judgment purposes, is that it could and would have made the payment by the 6th of June, had American been willing to accept a payment between the end of May and that date. Finally, I do not believe that we can assume, at the summary judgment stage, that sending the notice care of the wrong party caused no delay, even though the right and wrong parties may both have been located in the same office building. The question of whether delay occurred, and if so how long, can be explored relatively easily, although neither side has yet done so. I would place the burden on the party that misaddressed the letter.