NOT DESIGNATED FOR PUBLICATION
This appeal involves cross-motions for summary judgment and peremptory exceptions raising the objections of no cause of action and prescription in a suit for declaratory judgment involving the interpretation of the terms of a promissory note regarding an option as to the interest rate to be charged for the eleventh through thirtieth years of the note. Finding error, we affirm in part, reverse in part, and remand.
FACTS AND PROCEDURAL HISTORY
On December 31, 1991, Louisiana Recreation & Entertainment, Inc. entered into a Borrowing Agreement with First Guaranty Bank (the Bank) for a revolving line of credit, which was secured by a Promissory Note (the Note) in the amount of $1,600,000.00, executed on the same date. Also on the same date, the Bank advanced Leisure Recreation & Entertainment, Inc. (Leisure)
The floor and ceiling were 4.00% and 12.00% per year, respectively. Leisure made the fixed monthly payments identified in the Note with the interest rate at 6.5% for years 1-5 and at 7.5% for years 6-10. On December 31, 2001, the beginning of year 11, the Bank continued to charge Leisure a 7.5% interest rate.
On October 7, 2013, Leisure filed a petition for declaratory judgment against the Bank, alleging that the Note required the Bank to calculate interest at the prime rate for years 11 through 30. Leisure further alleged that after notifying the Bank that it was improperly using a 7.5% interest rate, the Bank refused to correct the alleged error. Leisure sought a judgment declaring that in year 11 of the loan and thereafter, the Bank was required to calculate interest using the prime rate, which it contends was 4.75% in January of 2002. Leisure sought to have the court declare that the Bank erroneously computed the unpaid principal balance of its loan by approximately $425,000.00 and requested that the correct balance be computed in accordance with the Note's terms. Alternatively, Leisure sought a declaration that, to the extent the Bank miscalculated interest and the unpaid principal balance, Leisure was entitled to assert a defense to the Note's payment.
In response, the Bank filed exceptions of no cause of action and prescription. The Bank contended that Leisure failed to state a cause of action because Leisure did not allege that it had ever exercised its option to have the Bank apply the prime rate. The Bank also alleged that there was no requirement that it adjust the interest rate without Leisure's consent and that the option to adjust the interest rate expired after a reasonable time. The Bank also contended that the action was prescribed on its face because actions arising under a promissory note are subject to a five-year prescriptive period pursuant to La. C.C. art. 3498, and Leisure failed to file suit until eleven years after it had the option to choose the prime rate.
Before the exceptions were heard, the Bank answered the suit, raising prescription and its no cause of action exception as defenses in its answer. Leisure filed a motion for summary judgment declaring that the Bank was required to calculate the Note's current outstanding principal balance by using the prime rate from January 2002 forward. Leisure admitted that an option was in the loan documents, which required it to make an affirmative election as to the interest rate, and that it did not exercise the option. The Bank filed its own motion for summary judgment, seeking a declaration that Leisure failed to exercise its option to choose the floating interest rate and, therefore, the Bank's calculation of the interest rate was proper and Leisure's suit should be dismissed.
The exceptions and cross-motions for summary judgment were heard, and the trial court overruled the Bank's exceptions of no cause of action and prescription. The Bank gave notice of its intent to seek supervisory review of the ruling on its exceptions. The trial court then rendered judgment on the cross-motions for summary judgment, granting the Bank's motion, denying Leisure's motion, and dismissing Leisure's suit.
In its sole assignment of error, Leisure contends that the trial court erred in concluding that the Note did not mandate use of the prime rate to calculate interest in years 11-30, while providing it with the option of a floating prime rate or a fixed term prime rate. The Bank disagrees, contending that the Note's language establishes a fixed 7.5% interest rate in years 6-30; it claims that the option is the right to opt out of the 7.5% interest rate and into the prime rate. The Bank argues that since the option was not exercised, the interest rate remained unchanged. The Bank further asserted in its exception of no cause of action that because Leisure did not exercise the option, it had no cause of action.
The trial court determined that the interest provision:
The interpretation of the interest provision in the Note is a matter of contract interpretation raised by both parties on cross-motions for summary judgment. The proper interpretation of a contract is a question of law subject to de novo review on appeal.
"Contracts have the effect of law for the parties" and the "[i]nterpretation of a contract is the determination of the common intent of the parties." La. C.C. arts. 1983 and 2045. The reasonable intention of the parties to a contract is to be sought by examining the words of the contract itself, and is not assumed.
Leisure contends that by using the word "shall" in the interest provision, the Note indicates that use of the prime rate is mandatory in year 11, referring to
The mandatory application of the prime rate is supported by other provisions of the Note, which contemplate the automatic adjustment of the Note's interest rate to the prime rate in year 11. The pertinent repayment provision in the Note states:
X Option 5: OTHER (specify) 360 monthly payments as follows:
Section 3 of the Borrowing Agreement states:
The Note expressly states that the 7.5% interest rate terminates after the Note's tenth year. Moreover, the Note contains a stipulation in the repayment provision that contemplates that the Bank will automatically adjust the interest rate to match the prime rate. The Note states:
Additionally, Leisure's interpretation of the interest provision comports with rules of grammar. Leisure asserts that because it is not set off with a comma, the phrase "at option of Borrower" modifies the immediately preceding language, which is whether the prime rate will be "floating for a minimum of one year or fixed for a period of not less than one year, nor more than five years[,]" citing
Based upon the text of the Note, the context of the interest provision, grammatical rules, and canons of interpretation, we construe the Note's interest provision to mean that after year 10, Leisure had the option to have its interest rate calculated according to the prime rate floating for a minimum of one year or to have its interest rate fixed at the prime rate at the date the option is exercised for a period of not less than one year, nor more than five years, with a floor and ceiling.
In this case we must determine whether the failure to affirmatively exercise a choice as to the applicable interest rate nullifies the provision. The Note clearly does not provide that the interest rate would continue to be 7.5%, but it also does not state what would happen if Leisure failed to choose between the fixed or floating interest rate for a defined term. Additionally, the Note does not set forth how or when Leisure is to choose which interest rate and what term should be applied. Moreover, if Leisure were to choose a fixed prime rate for five years, for example, the Note does not specify what happens after that time period. Similarly, if Leisure were to choose a floating interest rate for one year, the Note does not set forth what happens afterwards. The Note is unclear as to whether the fixed or floating prime rate is a one-time selection in year 11.
Louisiana Civil Code article 1778 provides that if the term for performance of an obligation is not determinable, the obligation must be performed within a reasonable time. Pursuant to La. C.C. art. 1779, a term is presumed to benefit the obligor unless the agreement or circumstances show that it was intended to benefit the obligee or both parties. Because La. C.C. art. 2056 states that in case of doubt that cannot be otherwise resolved, a contractual provision must be interpreted against the party who furnished its text, we must construe the provision against the Bank.
The trial court found that when Leisure did not exercise the option, the Bank was not obligated to unilaterally adjust the interest rate. Leisure challenges the trial court's conclusion that by failing to exercise the option, it forfeited it and the interest rate remained at 7.5% for the remainder of the loan. Leisure contends that the option is an alternative obligation pursuant to La. C.C. art. 1808, which states, "[a]n obligation is alternative when an obligor is bound to render only one of two or more items of performance." Louisiana Civil Code article 1810 provides, "[w]hen the party who has the choice does not exercise it after a demand to do so, the other party may choose the item of performance." Leisure argues that when it failed to choose between the floating or fixed rate in year 11, the Bank had to demand that it make a choice, and only following an unanswered demand could the Bank choose which interest rate to apply.
The Bank disputes the characterization of the option as an alternative obligation and contends that the Note is an option contract pursuant to La. C.C. art. 1933. Louisiana Civil Code article 1933 states, "An option is a contract whereby the parties agree that the offeror is bound by his offer for a specified period of time and that the offeree may accept within that time." The Bank contends it had no obligation or duty to provide Leisure with notice of the option to select the interest rate because the Note contained no language obligating it to do so. The Bank contends that pursuant to La. C.C. art. 1928, because a time to accept or reject the option was not specified in the contract, the option lapsed after a reasonable time. Relying on
The Note's interest provision is not an option contract because it is not an offer for which the Bank is bound for a specified period of time and which Leisure may accept within that time. The Bank has not cited any cases holding that a provision in a note allowing a choice of a period of time to fix an interest rate is an option contract. The Note's interest provision is more similar to an alternative obligation because for years 11-30, Leisure could choose to pay interest at a floating rate or at a fixed rate for a definite period of time. Leisure relies on La. C.C. art. 1810 allowing the other party to choose the item of performance if the party with the choice does not exercise it after a demand to do so.
Attached to the Bank's motion for summary judgment is the affidavit of Donna Hodges, the Bank's file room manager; attached to her affidavit as an exhibit was a May 24, 2013 letter from the Bank's representative to Lorie Sentell with Collins Music Company, Inc., an affiliate of Leisure, which stated:
The Bank also attached to Ms. Hodges' affidavit a July 8, 2013 letter from Leisure's former attorney to the Bank, wherein he stated he was asked to review the May 2013 correspondence, and he believed the Bank had been overcharging interest to Leisure since 2002 because the prime rate at that time was 4.75%. Attached to Ms. Hodges' affidavit for the Bank and to the affidavit of Bonnie J. Bush, Leisure's Chief Financial Officer, in support of Leisure's motion for summary judgment, is a July 15, 2013 letter from the Bank's representative to then-counsel for Leisure. The letter stated that the Bank had no obligation to provide notice to the borrower:
If the Bank's May 24, 2013 letter is considered a demand that Leisure choose the interest rate and term, then because Leisure failed to choose, the Bank would have the option of choosing between a floating prime rate for a minimum of one year or a fixed prime rate for a period of not less than one year nor more than five years pursuant to La. C.C. art. 1810. However, there is an issue of fact as to whether the May 24, 2013 letter constitutes a demand because it is contradicted by the letter the Bank sent about six weeks later, which stated that, due to the failure of the borrower to choose the interest rate and term, the interest rate would remain at 7.5%. But, even if the Bank is considered not to have made a demand on Leisure to choose an interest rate, such that La. C.C. art. 1810 is inapplicable, the interest rate for years 11 through 30 should be the prime rate because the Note provides that in "years 11-30," the simple interest rate "shall be at the Citibank Prime . . . with floor and ceiling as shown above." In support of its motion for summary judgment, Leisure offered an affidavit from Ms. Bush containing an amortization based upon a one-year fixed Citibank prime rate to show that the Note was paid in full. However, based upon our finding that there are genuine issues of material fact as to whether the Bank demanded that Leisure exercise its choice and the potential right of the Bank to choose the interest rate and term, Bush's amortization based upon Leisure's choice of prime rate cannot be used to establish that the loan was paid in full.
Leisure contends that La. R.S. 9:3509 requires the Bank to automatically apply any available decrease in interest to the loan. The Note states that it would be governed under Louisiana law and that the loan was entered into primarily for business or commercial purposes "subject to La. R.S. sec. 9:3509."
La. R.S. 9:3504(D)(3) states, in pertinent part:
(emphasis added.) Leisure argues that under these statutes, the borrower and lender may agree to permit the lender to automatically increase an adjustable interest rate when the relevant index rate rises, but regardless of what the parties have agreed to, the lender must automatically decrease an adjustable interest rate when the relevant rate falls. The Bank contends that Leisure did not exercise the option to use an adjustable or floating interest rate, so the statutes do not apply. In this case, because Leisure did not choose an adjustable or floating interest rate, La. R.S. 9:3509.1 and 9:3504(D)(3) are not applicable.
Based on the language in the Note and its references to the Borrowing Agreement and the correspondence between the Bank and Leisure's representatives, the trial court erred in granting the Bank's motion for summary judgment based upon its finding that there were no genuine issues as to material fact and that as a matter of law, the Bank was not required to calculate interest at the prime rate for years 11 through 30. The Note did not provide that if Leisure failed to exercise the option to choose a fixed or floating interest rate for a specific time period, the Bank could continue to use the 7.5% interest rate, but it did provide for the use of the prime rate as the interest rate for years 11-30 regardless of whether Leisure exercised the option. However, we also find the trial court did not err in denying Leisure's motion for summary judgment based on our finding that a genuine issue of material fact exists as to whether the Bank made a demand upon Leisure to exercise its choice of interest rate pursuant to La. C.C. art. 1810, and, if so, upon Leisure's failure to exercise the choice, which interest rate and for what term the Bank would choose to apply. Additionally, based on our resolution of the trial court's action on the motions for summary judgment, we find that the trial court did not err in denying the exception of no cause of action raised by the Bank.
The Bank contends that the trial court erred in denying its exception of prescription because Leisure did not file suit within five years from the date the first disputed installment payment came due, in 2002, when it argues the option in the Note matured.
Although evidence may be introduced to support or controvert any objection pleaded by the peremptory exception, such as prescription, in the absence of evidence, an objection of prescription must be decided upon facts alleged in the petition with all allegations accepted as true. La. C.C.P. arts. 927(A)(1), 931;
The right to seek a declaratory judgment does not itself prescribe. However, the nature of the basic underlying action determines the appropriate prescriptive period. This is because prescription is an issue regarding a plaintiff's standing to seek the declaratory judgment.
The Bank asserts that La. C.C. art. 3498 applies whether the maker or the holder seeks to enforce a provision of a note, relying on
Louisiana Civil Code article 3466 states, "If prescription is interrupted, the time that has run is not counted. Prescription commences to run anew from the last day of interruption." Acknowledgement of a debt or obligation interrupts prescription and erases the time that has accrued, with prescription commencing anew from the date of interruption.
In this case, the Note was payable in installments and there was no acceleration because there had been no default.
As earlier discussed, a genuine issue of fact exists as to whether the Bank demanded that Leisure choose the fixed or floating prime rate for a specific time, and, if it did not, then the Bank should have applied the prime rate for varying periods of time at its option in accordance with the Note. Yet, it is unclear from the Note specifically when the choice had to be made, and, depending on what choice was made, whether it had to be made again. From the face of the petition, the Note, and the Borrowing Agreement, which is what the trial court could consider in ruling on the exception of prescription at the point in time it was raised, it is unclear when a prescriptive period commenced, if at all. Therefore, the burden was on the Bank to show that Leisure's action was prescribed and it failed to meet this burden. The trial court did not provide reasons for its ruling denying the exception of prescription, and in its reasons supporting its ruling on the motions for summary judgment, it found that Leisure never exercised the option and the Bank was not required to unilaterally adjust the interest rate. This reasoning appears to indicate that Leisure had one opportunity to exercise the option, but as discussed above, the Note is vague on this issue. If prescription ran on each monthly payment from the date payment was due, was interrupted when Leisure made payment on the Note, and began running again after payment was made, arguably prescription would have run as to some of the installments and not as to the others.
Therefore, as to Leisure's assignment of error, we find that the trial court erred in granting the Bank's motion for summary judgment and dismissing the suit because the Note did not establish that if Leisure failed to exercise the option to choose a fixed or floating interest rate for a specific time, the Bank could continue to use the 7.5% interest rate. The Note did provide for the use of the prime rate as the interest rate for years 11-30 regardless of whether Leisure exercised the option. However, we find the trial court did not err in denying Leisure's motion for summary judgment based on our finding that a genuine issue of material fact exists as to whether the Bank made a demand upon Leisure to exercise its choice pursuant to La. C.C. art. 1810, and, if so, because Leisure failed to choose, which interest rate and term the Bank would choose to apply.
As to the Bank's exception of no cause of action, for the reasons pertaining to the motions for summary judgment, we deny the writ as to the trial court's denial of the exception. As to the exception of prescription, on the showing made, we find no error in the trial court's denial of the exception.
For the above reasons, First Guaranty Bank's application for supervisory writ of review (2016 CW 0281) is denied. The trial court erred in granting the motion for summary judgment filed by First Guaranty Bank and dismissing the suit and that part of the judgment is reversed. That part of the trial court judgment denying the motion for summary judgment filed by Leisure Recreation & Entertainment, Inc., is affirmed. The matter is remanded to the trial court for further proceedings. Costs of this appeal are to be equally divided between Leisure Recreation & Entertainment, Inc., and First Guaranty Bank.
CRAIN, J., concurring.
For years 11-30, I interpret the note to provide interest at the applicable prime rate, floating for at least one year, with Leisure having the option at each year end to fix the rate for a period of not less than one year, nor more than five years. However, there remain unresolved, mixed issues of fact and law preventing summary judgment. See New Orleans & N.E.R. Co. v. Louisiana Const. and Imp. Co., 109 La. 13, 33 So. 51, 55 (La. 1902); Bickham v. Washington Bank & Trust Co., 515 So.2d 457, 458-60 (La. App. 1 Cir.), writ denied, 515 So.2d 1112 (La. 1987); see also Coleman v. Jim Walter Homes, Inc., 08-1221 (La. 3/17/09), 6 So.3d 179, 183; and see La. Civ. Code art. 2299; Johnson v. State Through Div. of Admin., 510 So.2d 87, 89 (La. App. 1 Cir. 1987).
Because Leisure has standing to seek a declaration of its rights under the note, the writ application is properly denied.