Unpublished Disposition, 848 F.2d 1243 (9th Cir. 1984)

MEMORANDUM^* 

Harris N. Murabayashi and others brought a class action against Honolulu Federal Savings and Loan Association (HonFed). The plaintiffs were borrowers at 6.25 percent on 20 year home mortgages in the 1960's from HonFed. They sought a declaratory judgment that the maximum increase permissible by the terms of their loans was 1.5 percent. They also sought damages for violation of the federal Truth in Lending laws, 15 U.S.C. 1640, et seq., and Regulation Z issued thereunder, 12 C.F.R. 226. They sought further relief under the Unfair Practices Act, H.R.S. Sec. 480-2.

The district court granted summary judgment in favor of HonFed. This court reversed. Murabayashi v. Honolulu Federal Savings and Loan Association, unpublished opinion, October 1, 1984. The district court had held that the terms of the loan agreements "unambiguously permit HonFed to raise the interest rate 1.5 percent per annum over three months, or 6 percent per year." Slip op. p. 2. We, however, observed that the notes did not comprise the entire agreement to be interpreted. Each promissory note had been executed together with a home mortgage. Under Hawaii law, the note and the mortgage had to be interpreted together. The mortgages did not permit HonFed to raise the interest rate over the interest rate "on said note." We held as follows:

It is unclear whether the phrase "on said note" means that the limitation on interest rate increases must be measured from the original interest rates on the home loans or from the interest rates as they changed over the life of the loan. We therefore conclude that the phrase "on said note" used in the mortgages is ambiguous because "there is a doubt" about its meaning." Slip op. p. 2.

We further noted that "unclear language in a mortgage is resolved against the drafter." But we permitted the parties to present extrinsic evidence to establish the terms of the agreements.

On remand six persons connected with HonFed were deposed by the plaintiffs. James Hallstrom, former chairman of the board of HonFed, testified that he understood the note permitted the bank to raise the interest rate "1 1/2 percent per annum and then as often as we care to do that, that is what we always explained to people." He said again that he understood "we had the right to escalate 1 1/2 percent every year, with proper notice." Similar testimony was offered by Richard Hee, a former loan officer of HonFed, that each year HonFed had the right to increase the interest rate 1 1/2 percent.

Two other former officers of HonFed said there was no discussion at the bank about the language of the mortgage and the language of the note. Richard H. Fukagawa, a former executive vice president of HonFed, testified categorically that there were no discussions regarding the language of the mortgage comparing it with the language of the note. Isamu Harry Endo, a former loan officer and vice president for marketing, testified that he had no understanding whether there was any limit on interest rate escalations during the life of the loan.

It is apparent that the testimony of Hallstrom and Hee takes a view of the note and mortgage which is different from the face of the note. The face of the note, as already construed by the district court, permits an escalation, after three years, of 6 percent per year over the interest rate in existence the previous year. All that is needed is for HonFed to give the appropriate three month notice four times each year. As was admitted by counsel for HonFed in oral argument, this plain meaning of the note leads to astronomical interest rates in the later years of a 20-year note. Neither Hee nor Hallstrom believed that that was what the bank could get. Consequently, they must have believed that the interest rate was somehow held in check by the terms of the mortgage.

The mortgage, as this court has already held in its prior opinion, was ambiguous and had to be construed against its drafter, HonFed. Not only was the mortgage ambiguous in the way this court has already held. There was a further ambiguity in that in the event of default as to any term of the mortgage, HonFed had the right to interest at the rate of 8 percent per annum. It is, of course, difficult to believe that an interest rate on its note could be escalated by the bank well above 8 percent while the default provision provided for only 8 percent.

HonFed appears to have misunderstood the burden that was placed upon it by the prior decision of this court. The court had found an ambiguity in the mortgage. HonFed had the burden of proving that the meaning of the mortgage, construed against it, did not control the note. HonFed failed to meet this burden. Instead, the testimony of Endo and Fukagawa show that HonFed had not confronted the problem. The testimony of Hallstrom and Hee show that the bank had an understanding of a note that was contrary to its plain meaning. We now accordingly hold that the note read together with the mortgage was ambiguous; that the ambiguity is to be construed against the drafter; and that therefore the maximum permissible interest on the loan was a raise of 1 1/2 percent during the life of the loan.

REVERSED AND REMANDED FOR FURTHER PROCEEDINGS NOT INCONSISTENT WITH THIS DISPOSITION.

WALLACE, Circuit Judge, concurring and dissenting:

We have a single issue before us: did the district court err in granting summary judgment to HonFed. I agree that it did so because the note and the mortgage are ambiguous and HonFed's extrinsic evidence does not resolve the ambiguity in favor of HonFed. We need not and I would not go any further. Therefore, I disagree with the majority that we should conclude that the maximum permissible interest on the loan was a raise of 1 1/2 percent during the life of the loan. Rather, we should simply reverse the summary judgment for HonFed and remand for trial. On remand, the plaintiffs could, of course, bring their own motion for summary judgment on this issue.