Estreito v. Citirealty Corp. (In Re Estreito)

Citations: 111 B.R. 294; 1990 Bankr. LEXIS 519; 1990 WL 32016Docket: BAP No. NC-89-1533 MeJV, Bankruptcy No. 3-86-03800 TC

Court: United States Bankruptcy Appellate Panel for the Ninth Circuit; March 6, 1990; Us Bankruptcy; United States Bankruptcy Court

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A junior lienholder, Citirealty Corporation, claimed interest on funds advanced to cure a debtor's default on a senior obligation. The debtor, Edward Estreito, contested this, asserting that the interest rate should be limited to 7% as specified in their Deed of Trust, while Citirealty sought a higher rate based on prior promissory notes. The bankruptcy court ruled in favor of Citirealty, leading to Estreito's appeal after a denied rehearing request.

The appeal was reviewed de novo, focusing on contract interpretation under California law. The Deed of Trust allowed Citirealty to pay prior encumbrances and recover those costs with interest at the legal rate. The bankruptcy court had awarded Citirealty 14.5% interest, reflecting one of the promissory note rates, but this decision was found to inadequately consider the explicit terms of the Deed of Trust. Ultimately, the appellate panel reversed the bankruptcy court's order regarding the interest rate.

Two primary questions arise regarding the interpretation of the phrase 'interest allowed by law in effect at the date hereof' in a legal context. Firstly, the phrase is determined to have a fixed legal meaning, specifically referring to the legal interest rate of 7% as established by California law. The relevant Deeds of Trust between Estreito and Citirealty stipulate reimbursement for advances 'with interest from date of expenditure at the amount allowed by law,' which is interpreted to mean the statutory rate. The term 'allow' is equated with 'permit,' and case law supports this interpretation.

California's Constitution mandates a 7% interest rate for loans or forbearances unless the parties agree to a higher rate in writing; however, the Deeds of Trust do not specify a higher rate, thus affirming that 7% is applicable. The phrase 'in effect at the date hereof' suggests a reference to a preexisting rate rather than a rate established at the time of the transaction, indicating the intention to use a statutory rate.

Further, the existence of two promissory notes with fixed rates of 14.5% and 20% implies that the Deed of Trust anticipates an interest rate that may fluctuate, favoring the interpretation of a legal rate rather than the contractual rates of the notes. Case law, particularly Beeler v. American Trust Co., reinforces that advances without a specified interest rate accrue interest at the legal rate, which is also supported by legal commentary. Thus, the conclusion is that the Deeds of Trust should be interpreted to provide for a 7% interest rate in accordance with California law.

Parties to the agreement were aware of the applicable legal precedent when forming their contract, thus any differing interest rate should have been explicitly stated. In cases where the contract is ambiguous or lacks a specified rate, the 7% Constitutional rate is implied. This principle is reinforced by the Beeler case, which indicates that creditor advances are subject to the legal rate unless an alternative is explicitly agreed upon. California case law consistently supports awarding the 7% legal rate when no interest rate is specified, as demonstrated in cases like Armstrong v. Picquelle and Schiffner v. Pappas. The conclusion drawn is that the 7% interest rate is mandated by the Deed of Trust and relevant legal principles, necessitating a reversal of the previous decision. Specific language from the Deeds of Trust outlines the Trustor's obligations regarding payments and expenses, emphasizing the requirement to compensate the Beneficiary or Trustee for any advances made, with interest at the legal rate. The analysis also considers both the higher promissory note rate of 14.5% and the statutory rate of 7%, acknowledging the potential for a third option based on logical reasoning and California authority.

Under the doctrine of subrogation, Citirealty could assume the role of the senior lienholder regarding advances made to address the debtor's defaults on senior obligations. The senior obligation accrued interest at 14%, meaning that if California courts accepted the subrogation theory, Citirealty would receive 14% on its advances. However, prevailing legal authority in California supports a 7% interest rate aligned with the state's constitutional legal rate. The document notes that the Deed of Trust is a common short form used in California, allowing for both variable and fixed-rate obligations. If it referred to a variable interest rate, the interest on advances would be determined by the prevailing contract rate at the time of the advance rather than the fixed rate at the signing date of the Deed of Trust.