GABBARD v. AMERICAN SAVINGS AND LOAN ASSOCIATION (1986)

Appellants Timothy and Catherine Gabbard filed a class action against respondent American Savings alleging that the lending institution improperly increased the interest rate on variable interest rate loans.   The trial court granted American Savings' motion for summary judgment and awarded the institution $25,000 in attorneys' fees.   The Gabbards appeal from both the judgment and the order granting attorneys' fees.

Permissible fluctuations in variable interest rates are pegged to fluctuations in an Index prepared by the Federal Home Loan Bank.  (Civ. Code, § 1916.5, subd. (a)(1);  Cal.Admin.Code, tit. 10, § 240.2, subd. (a)(1).) ¹  By law, decreases in interest rates are mandatory.  (Cal.Admin.Code, tit. 10, § 240.2, subd. (b)(7).)   The central issue on appeal is what constitutes a decrease in the Index mandating a decrease in the variable interest rate—a drop in the Index during any six-month period or a drop in the Index below that in effect at the time the loan was obtained?   We find that a decrease in a variable interest rate is only mandatory if the current Index drops below that in effect on the date of the loan.   We affirm both the judgment and the attorneys' fees order.

I. FACTS

On August 21, 1980, appellants Timothy and Catherine Gabbard borrowed $130,400 from respondent American Savings at a variable interest rate, secured by a deed of trust on Novato real property.   Changes in the interest rate are pegged to fluctuations in the Federal Home Loan Bank's Cost of Money Index.   Interest rate increases and decreases must be made so as to maintain the same margin above or below the initial interest rate of 13 percent as the latest Index is above or below the Index on the date of the note.  (§ 1916.5, subd. (a)(1);  Cal.Admin.Code, tit. 10, § 240.2, subd. (b).)  Rate changes may occur once every six months.  (See Cal.Admin.Code, tit. 10, § 240.2, subd. (b)(5).)   Both the promissory note and the deed of trust provide that changes in the interest rate may not exceed .25 percent in any six-month period, up to a maximum of 2.5 percent higher than the initial interest rate.   These documents also provide for mandatory decreases and optional increases in the interest rate, with the understanding that “the fact that [American Savings] may not have invoked a permissible increase, in whole or in part, shall not be deemed a waiver of [its] right to invoke said increase at any time thereafter․”  The note and deed include an acceleration clause and a prepayment penalty clause.   A clause requiring the Gabbards to pay all fees and costs of litigation appears in the deed of trust.

The Gabbards made all payments as required by the terms of the note.   In October 1982, the interest rate on their loan increased by .25 percent, although the Index decreased by .434 percent in the previous six-month period.   By this time, American Savings had accumulated 2.507 percent in unapplied interest increases, and both the .25 percent interest increase and the .434 percent Index decrease were deducted from the unapplied interest increases.   This left 1.823 percent in unapplied interest increases to carry over to the next six-month period.

In February 1983, the Gabbards were sent notice of their next interest rate change.   The Index decreased .385 percent, but American Savings decided not to change the existing interest rate.   Instead, it applied the .385 percent Index decrease against its 1.823 percent unapplied interest increases, leaving 1.438 percent in unapplied interest increases to carry over to the next six-month period.   The notice contained the following new language:  “The terms of your promissory note limit interest rate changes to 1/414 of 1% in any one six month period.   If the [Index] changes by more than 1/414 of 1%, the excess is carried forward to the next index change and may be used to offset that index's current change.   Thus, if there is a substantial unused adjustment for your loan, it could completely offset the current index change.   The result could be no change in the interest rate or an increase or decrease which might be just the opposite of the index's current movement.”

On March 22, 1983, the Gabbards sold their Novato property.   The promissory note immediately became due and payable.   American Savings demanded full payment of the loan balance, including a prepayment penalty of $7,118.50.   According to the promissory note, no prepayment penalty would have been due if the balance of the loan had been paid within 90 days “immediately following notice of any increase in the interest rate.”  (See § 1916.5, subd. (a)(5).)   However, the February 1983 notice reflected no change in the interest rate.   The Gabbards paid the penalty under protest and American Savings refused their demand for a refund.

In October 1983, the Gabbards filed a class action ² against American Savings.   The complaint alleges causes of action for unfair business practices, intentional and negligent misrepresentation, breach of contract, rescission, declaratory relief, and injunctive relief.   The complaint also prays for punitive damages, attorneys' fees, and costs.   In its answer, American Savings asked for attorneys' fees.

American Savings moved for summary judgment in March 1984.   The following month, the Gabbards moved for summary adjudication of the validity of the provisions of the promissory note and the deed of trust at issue on appeal.   The trial court granted American Savings' motion and denied that presented by the Gabbards.   The Gabbards' motion for new trial was also denied.   They filed a timely notice of appeal from the judgment.  (See Code Civ.Proc., §§ 12–12a.)   American Savings' motion for attorneys' fees was granted by the trial court and the Gabbards filed a timely notice of appeal from this order, as well.³

II. VARIABLE INTEREST RATE CALCULATIONS

A. The Dispute

The promissory note and the deed of trust both provide for periodic changes in the interest rate in accordance with the Index.   American Savings must maintain the same margin between the current Index and variable interest rate as that that existed between the initial Index and the initial interest rate.   (§ 1916.5, subd. (a)(1);  Cal.Admin.Code, tit. 10, § 240.2, subd. (b).)  The parties disagree about how to reconcile this requirement to maintain the “same margin” with another provision for a mandatory interest decrease.   (Cal.Admin.Code, tit. 10, § 240.2, subd. (b)(7).)   The Gabbards resolve this dilemma by construing a decrease in the Index mandating a decrease in the variable interest rate to be a drop in the Index during any six-month period.   American Savings, on the other hand, construes such a decrease to be any drop in the Index below the Index in effect at the time the Gabbards entered into the loan.

The Gabbards contend that only Index changes occurring during the most recent six-month period may be considered when determining whether the loan rate may vary.   They argue that the requirement to maintain the same margin between interest rate and Index as that existing on the date of the loan is subject to a mandatory obligation to decrease the interest rate on their loan if the Index decreases during the previous six-month period.   Accordingly, the Gabbards contend that American Savings cannot carry over unapplied interest increases from one six-month period to offset against Index decreases in a later six-month period.   They read the requirement of a mandatory interest decrease as an exception to the requirement that the lender maintain the same margin.

American Savings counters that, in order to maintain the same margin, changes in the Index and the interest rate must be measured in context—over the life of the loan.   Incremental changes in the Index are reported every six months, at which time the lender may adjust the variable interest rate, but the six-month changes are only relevant in the context of variations between Indices over the entire life of the loan.   Under this construction, American Savings must carry over interest increases and decreases that are not applied in a six-month period for possible offset against Index changes in subsequent six-month periods.   Thus the requirement of a mandatory interest decrease comes into play only if the current Index dips below the initial Index level.   This makes it possible to have an increased interest rate in one six-month period even though the Index decreased during the past six months, as long as the lender maintains the same overall margin between the variable interest rate and the Index that existed at the time the loan was made.   In this manner, American Savings can construe the “same margin” and “mandatory decrease” provisions as consistent.⁴

B. Loan Documents

First, the Gabbards contend that the promissory note and the deed of trust do not permit American Savings' method of calculating interest.   The loan documents provided that the initial interest rate “shall be increased and decreased from time to time in accordance with increases and decreases in the [Index].   Subject to the following provisions, such increases and decreases shall be effected in such manner as to maintain the same margin above or below the Initial Interest Rate as the last published [Index] is above or below the last published [Index] on the date of this Note:  ․ [¶] (e) Decreases in the interest rate shall be mandatory and increases shall be optional with the holder, but the fact that the holder may not have invoked a permissible increase, in whole or in part, shall not be deemed a waiver of the holder's right to invoke said increase at any time thereafter within the limits herein provided.”

 When construing a contract, the whole of the contract is to be considered, so as to give effect to every part, if reasonably practical, each clause helping to interpret the other.  (§§ 1641, 3541;  Medical Operations Management, Inc. v. National Health Laboratories, Inc. (1986) 176 Cal.App.3d 886, 893, 222 Cal.Rptr. 455;  see 1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 524, p. 447.)   This is precisely what American Savings did.   The deed and note require American Savings to maintain the same margin between the current Index and the current interest rate that existed between the initial Index and the initial interest rate.   As is illustrated in Appendix A, the Gabbards' proposed calculation method would lead to wildly varying margins, effectively rendering the provision requiring the lender to maintain the same margin a nullity.   By contrast, the interpretation employed by American Savings, with its carry-over of unused interest increases and decreases, maintains the same margin throughout the life of the loan.   It also requires a decreased interest rate if the current Index dips below the initial Index.   This interpretation does not negate one contractual provision to give effect to another, but gives effect to both.

 When contract language is ambiguous, it must not be given an absurd construction.  (Howe v. American Baptist Homes of the West, Inc. (1980) 112 Cal.App.3d 622, 627, 169 Cal.Rptr. 418;  see § 1638;  see also 1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 528, pp. 450–451.)   On the date that the loan was paid off, the variable interest rate was 0.750 percent higher than the initial interest rate, while the latest Index—reflecting the cost of money to lenders such as American Savings—was 2.188 percent higher than the initial Index.  (See Appen. A.)  Under the Gabbards' proposal, the ending interest rate would be the same as the initial interest rate, despite the 2.188 percent rise in the cost of money during the life of the loan—an absurd result.

Contracts must be interpreted in a reasonable manner.  (§§ 1643, 3542;  see Delucchi v. County of Santa Cruz (1986) 179 Cal.App.3d 814, 823, 225 Cal.Rptr. 43, app. dismissed and cert. denied (1986) 479 U.S. 803, 107 S.Ct. 46, 93 L.Ed.2d 8;  see also 1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 528, pp. 450–451.)   Under American Savings' interpretation, the practice of carrying over unapplied interest is neutral, as decreases are carried over on the same basis as increases.  (See Appen. A.)  The loan documents state that if American Savings could increase interest rates but opted not to do so during a six-month period, the lender intended to carry over these unapplied interest increases for later use.   In fact, as the Appendix illustrates, the lender also carried over interest decreases that it could not apply.   This even-handed approach is more reasonable than that proposed by the Gabbards.

During the life of the loan, the Index did not drop below the initial Index of 9.530 percent, except during the first six-month period in which interest rate changes were prohibited.  (§ 1916.5, subd. (a)(4).)   As such, the mandatory decrease provision of the contract was never invoked.   American Savings' method of calculating the interest rate based on Index changes over the entire life of the loan is supported by the language of the loan documents.

C. Regulation Section 240.2

Next, the Gabbards contend that section 240.2 of title 10 of the California Administrative Code does not allow American Savings' calculation method.   Subdivision (b)(7)–(8) of section 240.2 provides:  “Subject to the provisions set forth below, an association in exercising its rights to change the interest rate pursuant to variable interest clause in its note shall effect such changes in such manner as to maintain the same margin above or below the initial interest rate of such note as the Standard is above or below the Standard at the date of such note․  [¶] (7) Decreases shall be mandatory and increases shall be optional with the lender.  [¶] (8) The fact that an association may not have invoked a permissible increase, in whole or in part, shall not be deemed a waiver of the association's right to invoke said increase at any time thereafter within the limits imposed by this subchapter.”   (Emphasis added.)

 The language of the regulation is almost identical to that used in the loan documents.   Our construction of the language of the loan documents is also consistent with our construction of the regulation.   An administrative regulation is presumed to be reasonable in the absence of proof to the contrary.  (Fillmore Union High School Dist. v. Cobb (1935) 5 Cal.2d 26, 32–33, 53 P.2d 349;  United Clerical Employees v. County of Contra Costa (1977) 76 Cal.App.3d 119, 125, 142 Cal.Rptr. 745.)   We have already determined that American Savings' interpretation, adopted by the trial court, is reasonable, while that interpretation urged by the Gabbards would lead to absurd results.  (See part B, ante.)

 Although the ultimate question of the interpretation of a regulation lies with the courts, an administrative agency's interpretation of its own regulation is entitled to judicial deference.  (Carmona v. Division of Industrial Safety (1975) 13 Cal.3d 303, 310, 118 Cal.Rptr. 473, 530 P.2d 161;  Illingworth v. State Bd. of Control (1984) 161 Cal.App.3d 274, 278, 207 Cal.Rptr. 471.)   The Commissioner of the Department of Savings and Loan interprets its regulations in the same manner American Savings does.   This bolsters our independent conclusion that the regulation, like the loan documents, supports American Savings' method of calculating the Gabbards' variable interest rate.

D. Civil Code Section 1916.5

Alternatively, the Gabbards contend that even if the loan documents and regulations support American Savings' method of calculating the variable interest rate on their loan, this method violates section 1916.5.   At the time of the loan in 1980 and at present, subdivision (a)(1) of section 1916.5 provided that a variable interest rate loan was subject to a “requirement that when an increase in the interest rate is required or permitted by a movement in a particular direction of a prescribed standard an identical decrease is required in the interest rate by a movement in the opposite direction of the prescribed standard.”   Although stated in different terms, the statute contains the same conflict of a provision for an established margin and a requirement of an interest rate decrease seen in the loan documents and the regulation.

The Gabbards contend that American Savings' construction of the statute is contrary to the legislative intent of section 1916.5 and that it violates the plain meaning of the statutory language.   After review of the statutory language itself and the legislative history, we cannot agree.   Looking at the language of the statute alone, we find it to be ambiguous—susceptible to either interpretation offered by the parties.   The legislative intent behind the language at issue on appeal is no clearer than the language itself.   Faced with an ambiguous statute and an uncertain legislative intent, we may apply rules of statutory construction.  (See Caminetti v. Pac. Mutual L. Ins. Co. (1943) 22 Cal.2d 344, 353–354, 139 P.2d 908, cert. den., 320 U.S. 802, 64 S.Ct. 428, 88 L.Ed. 484;  Leffel v. Municipal Court (1976) 54 Cal.App.3d 569, 572, 126 Cal.Rptr. 773.)

 As with its previous contentions, the Gabbards rely on an interpretation of the statute that would give no effect to the requirement that American Savings maintain the same margin between Index and interest rate throughout the life of the loan.   Courts must construe a statute as a whole, harmonizing the various parts and giving effect to each of those parts.   (Code Civ.Proc., § 1858;  Turner v. Board of Trustees (1976) 16 Cal.3d 818, 826–827, 129 Cal.Rptr. 443, 548 P.2d 1115;  Piazza Properties, Ltd. v. Department of Motor Vehicles (1977) 71 Cal.App.3d 622, 633, 138 Cal.Rptr. 357;  Carleson v. Unemployment Ins. Appeals Bd. (1976) 64 Cal.App.3d 145, 155–156, 134 Cal.Rptr. 278.)   American Savings' construction accomplishes this goal.   In addition, the Gabbards' interpretation would lead to absurd results.  (In re O'Neil (1977) 74 Cal.App.3d 120, 123, 141 Cal.Rptr. 338;  see People v. Daniels (1969) 71 Cal.2d 1119, 1139, 80 Cal.Rptr. 897, 459 P.2d 225 [absurd results flowing from proposed construction of statute makes it unreasonable to believe the Legislature intended this construction];  see also § 3542.)   For these reasons, we find American Savings' construction of this statute to be superior and correct.

 Finally, the Gabbards contend that regulation 240.2 constitutes an act in excess of jurisdiction as contrary to section 1916.5.   As section 1916.5 and regulation section 240.2 are consistent, this contention is obviously meritless.  (See also former Fin.Code, § 5255 [repealed Stats.1983, ch. 1091, § 1, p. 5771], now Fin.Code, § 8053 [commissioner's authority to promulgate regulations].)

III. DISCLOSURE **

IV. OTHER SUMMARY JUDGMENT ISSUES **

V. ATTORNEYS' FEES **

The judgment is affirmed.   The Gabbards shall pay all costs on appeal.

FOOTNOTES

1.   All statutory references are to the Civil Code, unless otherwise indicated.

2.   The class was not certified at the time the trial court issued the rulings that form the basis of this appeal.   Thus, the Gabbards are the only appellants before this court.

3.   This is an appealable order.  (Code Civ.Proc., § 904.1, subd. (b);  Valentine v. City of Oakland (1983) 148 Cal.App.3d 139, 145, fn. 5, 196 Cal.Rptr. 59.)

4.   Appendix A, attached to this opinion, illustrates the Index levels, margins, and carry-overs claimed by each party, using the facts of the Gabbards' loan as a basis.

FOOTNOTE.   See footnote *, ante.

CHANNELL, Associate Justice.