MAYNE v. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (1987)

In this appeal, we hold that even though the lending documents are written in technical language about a complex subject not easily comprehended by a layman, these documents accurately and completely explain the functioning of the loan terms and are not misleading as a matter of law.

On his own behalf and as a putative representative of a class of borrowers,¹ Franklin Mayne sued the Bank of America (the Bank), charging it with fraudulent and deceitful practices (Civ.Code, § 1710), unfair business practices (Bus. & Prof.Code, § 17500 et seq.) and with violating the Consumers Legal Remedies Act (Civ.Code, § 1750 et seq.) in connection with the offering of variable rate home loans.   Mayne charged that the Bank misrepresented the formula by which the variable interest rate would fluctuate and also alleged that the documents describing the option to extend the loan omitted material facts and misrepresented the total cost of exercising the option.   The Bank filed a motion for summary judgment against Mayne only, contending all its representations were accurate;  that Mayne admittedly did not rely on the written documents explaining the option when he entered into the loan agreement;  and that the documents describing the option to extend the loan complied with the federal Truth-in-Lending Act, which preempted the field.   The trial court found no material facts in dispute and granted summary judgment.   We affirm.

In November 1979, plaintiff inquired about a home loan at the Bank's Lafayette branch.   The Bank's loan officer briefly explained the variable rate mortgage.   When plaintiff asked how it worked, the loan officer explained, “[I]t's a complicated formula but in general, when interest rates go up, your rate will go up, and when interest rates go down, your rate will go down.”   He was given the same general explanation at another of the Bank's branches.   Sometime later he returned to the Lafayette branch and applied for the variable rate loan.

The variable rate loan was offered pursuant to Civil Code section 1916.5.   Under that statute, and as explained in the loan documents, the interest rate was keyed to the Federal Home Loan Bank's cost of funds index (the FHLB index).

Under the terms of the loan agreement, the interest rate is adjusted one year after the initial loan and every six months thereafter.   The rate can fluctuate only 1/414 percent every six months and may increase up to a ceiling of 21/212 percent over the life of the loan.   The initial percentage “spread” or difference between the beginning interest rate and the initial FHLB index is maintained throughout the life of the loan.   Thus, if the initial spread was 2 percent, the interest rate would fluctuate, when necessary, in order to maintain that two-point spread.   But since the rate can fluctuate only 1/414 percent every six months, it is possible that the loan rate may increase when the FHLB index is declining.   The process was explained, along with examples, in a pamphlet entitled “The Facts About Bank of America's Residential Real Estate Loan Programs” (the Facts Booklet), which was available in the Bank lobby and which plaintiff received when he entered into the loan agreement.

Plaintiff argues that the “carry-over effect” of the rate formula was not adequately explained in the loan documents and that it significantly differs from the oral representation of the Bank's loan officer, who stated generally that the variable loan rate would rise and fall with the general interest rates.   The loan also contained an option to extend the loan term in the event of a rate increase.   This was required by Civil Code section 1916.5, subdivision (e).

One year after plaintiff agreed to the loan, he received a rate increase notice which offered him the option to extend the loan term in order to keep his monthly payments constant where possible.   The rate review notice provided:  “If the interest rate on your loan is being increased, you have the following options:  [¶] 1. Pay the increased monthly payment shown above. [¶] 2. Extend the maturity of your loan by approximately 121 months and continue to pay the same monthly payment amount.   If this is your desire, please complete the section below (with your signature(s) and date) and return it to us in the envelope provided, so that we will receive it no later than Jan. 23[,] 1981.”   (Italics added.)

Plaintiff interpreted this provision to mean that if he opted to extend the loan term, his interest payments would forever remain the same over the length of the extended loan term, in effect, transforming the agreement into a fixed interest loan.   In doing so, plaintiff also relied on the truth-in-lending statements, which provided in pertinent part:  “In the case of an interest rate increase, you may elect to have the increase given effect by increasing the number of monthly payments to be made, up to a maximum total loan term as extended of 480 months, so that any increase in your monthly payment which would have been caused by the rate increase is reduced or eliminated.”   (Italics added.)

Mayne also received the brochure entitled “It's time to look at your Standard Vari–Rate loan” (rate review brochure), which accompanied the rate review notice.   In pertinent part, that brochure provided:  “If the interest rate on your loan is increased, you have the following options:  [¶] You may accept the higher monthly payment.  [¶] You may request an extension of the maturity date of your loan.   The maturity date can be extended as necessary in order to allow your monthly principal and interest payment to remain the same.   This extension can be up to a maximum of 40 years from the date of the loan.”   (Italics added.)

Before he agreed to the extension, plaintiff also reviewed the Facts Booklet.   In part, the Facts Booklet stated that upon an increase in the loan rate the borrower may “(3) extend the maturity of [his] loan, within the limits allowed by law and bank policy, which may reduce or eliminate any increase in [his] monthly principal and interest payment.”  (Italics added.)

Contrary to plaintiff's understanding, the extension of the loan fixed the monthly payments at the same amount for only six months at a time, after which the rate was allowed to fluctuate as before.   Contending that the Bank's representations were unintelligible and misleading, and that he would not have purchased the variable rate loan nor extended its term had he known the true facts, plaintiff sued, along with six other plaintiffs, seeking injunctive and declaratory relief, reformation, restitution and compensatory and punitive damages.

I

 The Unfair Business Practices Act (Bus. & Prof.Code, § 17200 et seq.) and the Consumers Legal Remedies Act (Civ.Code, § 1750 et seq.) both prevent the use of false or misleading representations in the sale of goods or services.   The statutory proscription against fraud and deceitful practices (Civ.Code, § 1710) also protects against intentional and negligent misrepresentations in the same context.   Under all the statutes listed above, the test for determining whether the Bank's representations were misleading is the same, i.e., whether the public is likely to be deceived.  (See Kagan v. Gibraltar Sav. & Loan Assn. (1984) 35 Cal.3d 582, 596–597, 200 Cal.Rptr. 38, 676 P.2d 1060;  Chern v. Bank of America (1976) 15 Cal.3d 866, 876, 127 Cal.Rptr. 110, 544 P.2d 1310.)

 Plaintiff argues that the issue of whether or not the oral and written representations concerning the loan provisions were deceptive and/or misleading is a question of fact, which prevents resolution by summary judgment.  (Kagan v. Gibraltar Sav. & Loan Assn., supra, 35 Cal.3d at pp. 596–597, 200 Cal.Rptr. 38, 676 P.2d 1060;  People v. Toomey (1984) 157 Cal.App.3d 1, 16, 203 Cal.Rptr. 642;  Payne v. United California Bank (1972) 23 Cal.App.3d 850, 855–856, 100 Cal.Rptr. 672.)   We disagree.   No material dispute exists concerning the relevant facts in this case.   The oral representation and the language in the loan documents that were presented to plaintiff are uncontradicted.   The principal issue in this case is a legal one, namely, whether the Bank's oral and written representations were misleading and deceptive under the foregoing statutes.   Where there is no ambiguity in the legal documents, the duty to interpret the legal effect of contracts is the court's responsibility.  (See generally, Civil Service Employees Ins. Co. v. Superior Court (1978) 22 Cal.3d 362, 366–369, 149 Cal.Rptr. 360, 584 P.2d 497;  Chern v. Bank of America, supra, 15 Cal.3d at p. 872, 127 Cal.Rptr. 110, 544 P.2d 1310;  Bareno v. Employers Life Ins. Co. (1972) 7 Cal.3d 875, 881, 103 Cal.Rptr. 865, 500 P.2d 889.)   Nothing in plaintiff's opposition to the motion raises a triable issue of fact, and summary judgment cannot be reversed on this ground.

In Kagan v. Gibraltar Sav. & Loan Assn., supra, upon which plaintiff relies, the Supreme Court reversed a summary judgment after concluding that a triable fact existed as to whether Gibraltar was guilty of false advertising.   (35 Cal.3d at p. 597, 200 Cal.Rptr. 38, 676 P.2d 1060.)   That case is distinguishable in that the bank's statement to plaintiff that no management fee would be assessed against her Individual Retirement Account was contradicted by its conduct.   Here, plaintiff does not contend the Bank acted in a manner that was inconsistent with the loan documents, but only that he could not understand the loan documents.   The latter scenario presents a classic opportunity for legal interpretation of these papers.

Plaintiff introduced the declarations of 13 other borrowers who indicated they similarly believed that the loan interest rate would rise and fall in tandem with the FHLB index.   Plaintiff also relied on the declaration of Veda Charrow, his expert witness on linguistics, who opined that the loan documents were very difficult to read and that a borrower would not be able to deduce that his interest rate might increase, even though the index rate decreased.   These declarations are of no assistance in deciding a question of law.   The court must first decide if a document is ambiguous or if the language is susceptible to more than one reasonable interpretation.  (Delta Dynamics, Inc. v. Arioto (1968) 69 Cal.2d 525, 528, 72 Cal.Rptr. 785, 446 P.2d 785.)   We find the language in the loan documents is not susceptible to different reasonable interpretations.   It is no surprise that several people interpreted the loan documents differently.   It is even possible that attorneys reading these documents for the first time would come up with various interpretations.   But these divergent views do not in any way affect our duty to resolve questions of law.   It is left to the courts to decide the reasonable interpretation of contracts, and the opinion evidence supplied by plaintiff therefore must be disregarded.²  The ultimate legal question is whether a reasonable consumer is likely to be confused after considering all the undisputed oral and written representations.  (See Hulsey v. Elsinore Parachute Center (1985) 168 Cal.App.3d 333, 340–341, 214 Cal.Rptr. 194;  Frank Music Corp. v. Metro–Goldwyn–Mayer, Inc. (9th Cir.1985) 772 F.2d 505, 520–521.)

II

 Plaintiff contends that taken together, the note, the truth-in-lending statement, the deed of trust, and the loan officer's remark did not accurately apprise him of what he refers to as the “carry-over effect” of the interest rate.   He argues that the loan officer's explanation that the rate would fluctuate with interest rates in general led him to believe that his rate would move up when the FHLB index moved up and down when the FHLB index moved down.   He asserted that this explanation was not contradicted by anything he read in the loan documents.³

Viewing these documents together, it is clear that the loan rate does not match every directional move in the FHLB index, as plaintiff would have us conclude.   In essence, the loan rate is increased if the current spread is less than that which existed at the time the loan was executed.   Thus, the interest rate will increase in order to maintain the spread, even though the index rate dropped during the most recent review period.

Although the rate formula is inherently complex and the language describing its operation is technical, it is a complete and accurate explanation of the formula.   It is a fact of modern society that regularly we are confronted by innovative, but hard to understand, financing methods designed to power the engine of commerce.   In many cases this requires business forms to be written in technical legal terms unfamiliar to a layperson.   Anybody who has bought a house, a car, or has some form of insurance policy, or has purchased an appliance is presented with a contract or a warranty which explains, in often minute detail, the rights and obligations of the owner, usually as required by state and/or federal law.   These documents must be read carefully to understand his or her rights and obligations.   Not every concept can be written in language easily understandable, but that does not mean these documents are misleading or deceptive.   It does, however, require the consumer to review the document carefully and demand that the lender or seller explain the terms which are not immediately clear.

The loan documents fall into this same category.   These documents under review give an accurate description of the manner in which the variable rate fluctuates.   No material provision is omitted, concealed, or designed to trap the unwary.   A review of the loan terms should have put plaintiff on notice that the loan rate does not move in tandem with the fluctuation of the index.   If plaintiff did not understand the precise mechanics of the formula, he should have asked to have it explained to him.   Given his level of education and work experience, he was certainly capable of understanding the method of calculation.   Since 1966, plaintiff has been a commercial airline pilot.   He has a college degree in business administration, for which he studied courses in real estate, economics and accounting.   Additionally, he is part owner of a family business and is a limited partner in a company that manufactures computers.   With his background he should be able to understand the rate mechanism or intelligently request an explanation.   By no means do we imply that only a college-educated person could comprehend the language in the loan documents.   The point is that plaintiff certainly was competent to comprehend the explanation of the rate formula contained in the loan documents or seek help to gain that understanding.

The Bank provided plaintiff and its borrowers with the Facts Booklet, which used everyday language to explain each loan term, including the variable rate formula.   The Facts Booklet stated:  “With standard VARI–RATE loans, any change in the interest rate may not necessarily be made in direct relation to the most recent movement in the FHLB index.   It is theoretically possible that in the event of extreme fluctuations in the index—and, therefore, in the spread difference—the interest rate on your loan would go up following a rate review even though the FHLB index used for that review had declined since the previous review.”  (Second italics added.)   Immediately following the explanations were examples of how the spread affects the variable interest rate.

These documents explain the mechanics of the variable rate formula accurately and completely and in language a reasonably intelligent consumer could comprehend.   The loan officer's brief statement to plaintiff in no way contradicts or undermines the explanation provided in the documents which were received by plaintiff prior to executing the loan agreement.   When plaintiff first made inquiries about home loans, the Bank's loan officer told him, in a general way, about the availability of variable rate loans.   She explained briefly as to how they worked:  “[I]t's a complicated formula but in general, when rates go up, your rate will go up and when interest rates go down, your rate will go down.”   This was not an inaccurate or misleading statement and was a general description of the variable rate mechanism.   It was not meant to be an explanation of particular loan terms, and the plaintiff could not reasonably rely on it to the exclusion of the language contained in the loan documents.

III

 Plaintiff argues that he was misled about the effect of exercising the option to extend the loan term, and had he known the true effect of the option he would not have agreed to it.   Specifically, he argues that the language of the relevant loan documents led him to reasonably believe that he could extend his loan for 10 years and freeze his interest rate at 12.875 percent.   In deciding to exercise the option, plaintiff had before him the rate review notice and the rate review brochure, as well as the truth-in-lending statement.   One year after plaintiff entered the loan, he received a notice of a rate increase, which was consistent with the terms of the note.   The rate review notice provided:  “If the interest rate on your loan is being increased, you have the following options:  [¶] 1. Pay the increased monthly payment shown above. [¶] 2. Extend the maturity of your loan by approximately 121 months and continue to pay the same monthly payment amount.   If this is your desire, please complete the section below․  [¶] Also, please remember, you may prepay all or any part of your principal—without a prepayment premium—within 95 days from the date of any notification of a rate increase.”  (Italics added.)   It is plaintiff's contention that the language in this document and the others, infra, caused him to believe that he could freeze his interest rate at the current level if he agreed to extend the maturity of the loan by 10 years.

The rate review brochure explained the option as follows:  “You may request an extension of the maturity date of your loan.   The maturity date can be extended as necessary in order to allow your monthly principal and interest payment to remain the same.   This extension can be up to a maximum of 40 years from the date of the loan.   The accompanying letter provides instructions as to how to request this extension.”  (Italics added.)   The truth-in-lending statement contained the following provision:  “In the case of an interest rate increase, you may elect to have the increase given effect by increasing the number of monthly payments to be made, up to a maximum loan term as extended to 480 months, so that any increase in your monthly payment which would have been caused by the rate increase is reduced or eliminated.”  (Italics added.)   The Facts Booklet plaintiff received when he entered into the loan agreement stated:  “[Y]ou have three options if your interest rate is increased․  [¶] (3) extend the maturity of your loan, within the limits allowed by law and bank policy, which may reduce or eliminate any increase in your monthly principal and interest payment.”  (Italics added.)   Plaintiff contends that the language was deficient in that it failed to explain that exercising the option “provides only a temporary 6–month reprieve from future increases.”  (Original italics.)

We conclude that the language in these documents is not susceptible to the interpretation given by plaintiff and there is nothing therein to suggest that either the monthly payments or the interest rate will remain the same for the extended life of the loan.   The manifest purpose of the extension is to amortize the loan up to a maximum period of 40 years without increasing the monthly payments.   But once the loan is extended to its maximum, the monthly payments must go up if the FHLB index also goes up.   This should have been apparent to plaintiff since he purchased a variable rate loan, and nothing in the documents could reasonably be interpreted to eliminate that central feature of the loan.

Our reading of the documents is not contradicted by the rate review notice and brochure, the language of which offers the option to extend the loan “in order to allow [the] monthly principal and interest payment to remain the same.”   This language, when read in its complete context, means only that plaintiff could extend the loan up to 40 years in order to keep his monthly payments constant.   But he could not extend the loan beyond that time if interest rate increases caused his monthly payments to increase.   This was not a guaranty that the payments would be frozen for the life of the loan.

The language in the brochure is substantially identical to language in Civil Code section 1916.5 authorizing the variable rate loans:  “(e) [W]hen there is an increase in the interest rate of a loan subject to this section ․ the term of such loan may be extended at the option of the borrower for such additional period as may be required to amortize the loan without increasing the existing monthly payment, but not to exceed a maximum term of 40 years.”   We conclude that the effect of the option is accurately explained by the language in the documents.

IV

 Plaintiff contends that summary judgment is expressly forbidden on his fifth cause of action brought under the Consumer Legal Remedies Act (Civ.Code, § 1750 et seq.).   He relies on Civil Code section 1781, subdivision (c)(3), which provides in part:  “A motion based upon Section 437c of the Code of Civil Procedure shall not be granted in any action commenced as a class action pursuant to subdivision (a).”

The Bank responds by arguing that the motion for summary judgment in this case is identical to the motion that “[t]he action is without merit or there is no defense to the action ” provided in Civil Code section 1781, subdivision (c)(3).  (Italics added.)

The parties have not cited any cases, and we have found none, which discuss the distinction between the motion for summary judgment and the motion that the action is without merit under Civil Code section 1781, subdivision (c)(3).   Plaintiff relies on Anthony v. General Motors Corp. (1973) 33 Cal.App.3d 699, 109 Cal.Rptr. 254, in support of his proposition that the motion for summary judgment was in error.  Anthony adds nothing to our understanding of the procedures involved herein and does not state that the test for finding the case to be without merit is different under a motion for summary judgment or a motion brought under section 1781, subdivision (c)(3).

Code of Civil Procedure section 437c provides in part:  “(a) Any party may move for summary judgment in any action or proceeding if it is contended that the action has no merit or that there is no defense thereto.”   This language is identical to the language in Civil Code section 1781, subdivision (c)(3).

Any differences that exist between the two motions are not relevant in this context.   We note just a few of these differences.   The motion for summary judgment must be filed and heard before trial, but it appears the motion under Civil Code section 1781, subdivision (c) may be made at any time during the course of the proceedings.   A motion for summary judgment may be supported by affidavits and other supporting admissible evidence, including discovery materials such as interrogatories, admissions, depositions and declarations.   In addition, the supporting and opposing papers must contain a separate statement setting forth the material facts claimed to be either undisputed or disputed.  (See 6 Witkin, Cal.Procedure (3d ed. 1985) Proceedings Without Trial, § 276, p. 576.)   On the other hand, Civil Code section 1781, subdivision (c) provides only that a motion is to be supported by affidavit and says nothing about other documentation.   It appears to be a hybrid, falling somewhere between summary judgment, with its extended opportunity to introduce supporting evidence, and what once was called a “speaking motion,” to dismiss an action as a sham.  (See 6 Witkin, op. cit. supra, § 279, at pp. 579–580.)   But whatever its incarnation, the court has always had the inherent power to dismiss an action when the pleading could not be supported by proof.   (Op. cit. supra, § 274, at pp. 573–575.)

We are called upon to interpret the effect of several loan documents and an oral representation, the contents of which are undisputed.   A motion to resolve the principal legal issue in the case is proper under Civil Code section 1781, subdivision (c)(3), to the same degree as if a motion for summary judgment were permitted.  (See Civil Service Employees Ins. Co. v. Superior Court, supra, 22 Cal.3d at p. 369, 149 Cal.Rptr. 360, 584 P.2d 497 [partial summary judgment motion, over interpretation of insurance contract, which was made and granted prior to class certification was held to be proper].)  Accordingly, we find that no prejudice resulted from the failure to style the motion as one under Civil Code section 1781, subdivision (c)(3).⁴

In summary, we find that the language in the loan documents and the supporting material, as well as the loan officer's representation, were accurate and complete as a matter of law.   We do not need to address the remaining issues of plaintiff's reliance and federal preemption.

The judgment is affirmed.

FOOTNOTES

1.   The class was never certified.  (Civ.Code, § 1781, subd. (c).)

2.   In a subsidiary argument, plaintiff urges that the “FHLB Index was not particularly responsive to general interest rate movements, and that it lacked downward flexibility.”  In support of this contention, plaintiff submitted the declaration of Alan Rothenberg, who, as an officer with the Bank, sat on the Bank's variable rate mortgage project committee.   Rothenberg was of the opinion that the “Moody” index be used instead of the FHLB index which had historically only moved upward.   Plaintiff cites this reference as evidence that the loan officer's general statement was misleading and that the rate formula did not operate as advertised.   As stated above, the validity of the index is not at issue, merely the marketing of the loan.   Since we have concluded that the loan documents are accurate, complete and clearly explain the variable rate formula, the reliance on Rothenberg's statement is unavailing.

3.   The note and the deed of trust, which contain the same language, provide in pertinent part:“2. (a) The undersigned agrees that on a date one (1) year from the due date of the first instalment [sic] of principal and interest of this Note and semi-annually thereafter (“Interest Adjustment Dates”) the interest rate specified above and any increased or decreased rate established pursuant to this provision:“(I) Shall be increased by one-fourth of one percent (1/414%) if, with respect to any such Interest Adjustment Date, the rate of interest of this Note on the day preceding such Interest Adjustment Date is more than one-fourth of one percent (1/414%) less than the sum of (A) and (B) of clause (II) of this subparagraph 2(a).“(II) Shall be decreased by one-fourth of one percent (1/414%) if, with respect to any such Interest Adjustment Date, the rate of interest of this Note on the day preceding such Interest Adjustment Date is more than one-fourth of one percent (1/414%) greater than the sum of:“(A) the Index (defined below) for the half year ending June 30 or December 31, as applicable, immediately preceding the sixtieth (60th) day before such Interest Adjustment Date but if that Index for that half year is not available on that sixtieth (60th) day, the Index for the half year immediately preceding that half year, plus“(B) the difference between the initial interest rate of this Note and the Index last available before the date of this Note.”  (Italics added.)The federal truth-in-lending statement provided in pertinent part:“II.  B. The Annual Percentage Rate is subject to change.   The promissory note will contain a provision for a variable interest rate determined as follows:“On February 1, 1981, and semi-annually thereafter (“Interest Adjustment Dates”), the original interest rate to be shown on the note and any other rate established pursuant to such provision shall be increased by 1/414 if the rate of interest on the day preceding such Interest Adjustment Date is more than 1/414 less than the sum of:  (a) the Index (defined below) for the half year ending June 30 or December 31, as applicable, immediately preceding the 60th day before such Interest Adjustment Date, but if that Index for that half year is not available on that 60th day, the Index for the half year immediately preceding that half year, plus (b) the difference between the original interest rate and the Index last available before the date of the note, and shall be decreased by 1/414 if the rate of interest on the day preceding such Interest Adjustment Date is more than 1/414 greater than such sum.   However, the maximum net interest rate increase shall be 2 1/2 12 and the maximum interest rate shall be 153/838 per annum.”

4.   There is support for treating the motion for summary judgment as a motion for a determination that the action is without merit under Civil Code section 1781, subdivision (c)(3).  (See Kagan v. Gibraltar Sav. & Loan Assn., supra, 35 Cal.3d at p. 589, fn. 2, 200 Cal.Rptr. 38, 676 P.2d 1060.)

LOW, Presiding Justice.

KING and HANING, JJ., concur.