Gates v. Ohio Sav. Assn.Gates v. Ohio Sav. Assn.
Hugh M. Stanley and Thomas R. Simmons, Tucker, Ellis & West, L.L.P., 1150 Huntington Building, 925 Euclid Avenue, Cleveland, OH 44115-1414 (For Defendant Appellee).
MARY JANE TRAPP, P.J.
{¶1} Appellants, Charles R. and Barbara J. Gates, appeal the judgment of the Geauga County Court of Common Pleas granting summary judgment in favor of appellee, Ohio Savings Bank, n.k.a. AmTrust Bank (“AmTrust“),1 in connection with a
Substantive and Procedural History
{¶2} Substantive and Procedural History
{¶3} This appeal arises out of a mortgage loan transaction Mr. and Mrs. Gates entered into with AmTrust Bank on November 24, 1981. The Gates signed a 30-year Open-End Roll-Over Mortgage Note (“Note“) for a $96,000 loan, a refinancing of their prior mortgage loan secured by their home in Novelty, Ohio.
{¶4} This Note provided for an interest rate that adjusts every six months “to a new rate of interest equal to the prevailing rate of interest in effect and utilized by [AmTrust] *** for the same category of loans.” Furthermore, the Note provided that the adjustable interest rate cannot fall below a floor rate or go above the greater of two ceiling rates. The floor rate was defined as “the monthly Average Mortgage Contract Rate as published in the Federal Home Loan Bank Board Journal.” The ceiling rate was defined as “the greater of (a) 130% of the average auction yield for six months U.S. Treasury bills [“Cap A“] or (b) three percent (3%) over the rate for six month advances from the Federal Home Loan Bank of Cincinnati [“Cap B“] ***.”
{¶5} On November 24, 1981, the Gates signed a Rider to the Note providing that the adjustable interest rate “shall be decreased or increased to a new rate of interest equal to one percent (1%) below the rate of interest that would otherwise be prescribed by the Note ***.” In the event that Open-End Roll-Over Mortgages were discontinued, the Note provided for the calculation of the six-month adjustable interest rate, stating:
{¶6} “If *** [AmTrust] is not offering to make loans of the same category as this loan, the Contract Interest Rate to be applicable to this Note for the next succeeding six month period shall be the rate of interest then in effect for that type of loan being offered by [AmTrust] that, in the sole opinion of [AmTrust], has characteristics most similar to this loan.”
{¶7} AmTrust discontinued the use of Open-End Roll-Over Mortgage Notes for new mortgage loan transactions in 1982. AmTrust determined that its Adjustable Rate Mortgage (“ARM“) loan was the type of loan that had “characteristics most similar” to the Open-End Roll-Over Mortgage. Consequently, AmTrust applied the interest rate for that type of loan to the Gates’ loan; the adjustable interest rate for the ARM loans is set at 2.75% over the weekly average yield on U.S. Treasury Securities, adjusted to a constant maturity of one year as made available by the Federal Reserve Board, rounded to the next highest 1/8th of 1%.
{¶8} Since its inception, the Gates have received monthly mortgage statements from AmTrust identifying the current interest rate and other details, such as the allocation of interest and principal and the principal balance. The Gates have also received a notice from AmTrust every six months identifying the new interest rate pursuant to the ARM.
{¶9} In his deposition, Mr. Gates stated that, as early as the first six-month interest rate adjustment in 1982, he believed calculation of the interest rate was inconsistent with the terms of the Note. In 1993, Mr. Gates began calling and writing letters to AmTrust regarding the interest rate calculation. Mr. Gates did not receive a response until October 6, 2005 – a letter signed by Mr. David L. Yahr, a vice president
{¶10} Although Mr. Gates sought the advice of an attorney in 1993 and 1995 to explore potential claims against AmTrust, a complaint was not filed until February 24, 2006. Upon motion of AmTrust, the matter was removed to the United States District Court, Northern District of Ohio, Eastern Division. The District Court granted summary judgment in favor of AmTrust on the Gates’ claim that AmTrust had violated the Truth In Lending Act. The remaining claims were remanded to the trial court.
{¶11} The Gates filed a second amended complaint, asserting the following claims: (1) breach of contract, (2) fraud, (3) breach of fiduciary duty, (4) a claim that AmTrust failed to abide by federal banking regulations, and (5) an accounting. AmTrust moved for summary judgment, which the trial court granted. The only issue on appeal is the trial court‘s entry of summary judgment with respect to the Gates’ breach of contract claim. On appeal, the Gates assign the following errors for our review:
{¶12} “[1.] The trial court erred in enforcing Cap B even though the index in Cap B was unavailable to the general public and Ohio Savings Bank.
{¶13} “[2.] The trial court erred in enforcing Cap B even though the language describing Cap B was subject to totally opposite interpretations.
{¶14} “[3.] The trial court erred in enforcing Cap B even though the bank‘s calculation of periodic interest breached its obligation of good faith and fair dealing.”
Standard of Review
{¶15} Standard of Review
{¶16} This court reviews de novo a trial court‘s order granting summary judgment. Hapgood v. Conrad, 11th Dist. No. 2000-T-0058, 2002-Ohio-3363, at ¶13,
{¶17} “Since summary judgment denies the party his or her ‘day in court’ it is not to be viewed lightly as docket control or as a ‘little trial.’ The jurisprudence of summary judgment standards has placed burdens on both the moving and the nonmoving party. In Dresher v. Burt [(1996), 75 Ohio St.3d 280], the Supreme Court of Ohio held that the moving party seeking summary judgment bears the initial burden of informing the trial court of the basis for the motion and identifying those portions of the record before the trial court that demonstrate the absence of a genuine issue of fact on a material element of the nonmoving party‘s claim. The evidence must be in the record or the motion cannot succeed. The moving party cannot discharge its initial burden under
{¶18} The Supreme Court of Ohio has held that “the construction of a written contract is a question of law, which [is reviewed] de novo.” In re All Kelly & Ferraro Asbestos Cases, 104 Ohio St.3d 605, 2004-Ohio-7104, at ¶28. (Citations omitted.)
Ambiguity in a Contract
{¶19} Ambiguity in a Contract
{¶20} For ease of discussion, we initially address the Gates’ second assignment of error. The Gates argue the trial court erred in finding that the provision defining the ceiling rate as defined in the Note, entered into in November 1981, was unambiguous. As a result, they argue the trial court erred in dismissing their claim for breach of contract.
{¶21} As previously stated, this court recognizes that the interpretation of a contract is a purely legal question and, thus, we shall conduct a de novo review of the trial court‘s interpretation of the contract at issue, affording no deference to the trial court‘s interpretation.
{¶22} Addressing ambiguity in a written document, the Supreme Court of Ohio has noted:
{¶23} “In recent years, Ohio courts have devoted many pages to discussions of whether contracts, ballot initiatives, statutes, or even constitutional provisions are ambiguous. See, e.g., State v. Haven, 9th Dist. No. 02CA0069, 2004-Ohio-2512 ***; Ponser v. St. Paul Fire & Marine Ins. Co., 5th Dist. No. 2002CA00072, 2003-Ohio-4377, ***; State ex rel. Grammas v. Batavia Twp. Bd. of Trustees (Apr. 22, 1996), 12th Dist. No. CA95-10-069, 1996 WL 189034 ***. However, no clear standard has evolved to
{¶24} Therefore, the first question this court must decide, under the rules of contract construction, is whether the contract is ambiguous. If the contract is unambiguous, we decline to partake in the exercise of contractual interpretation and, thus, apply the contract as written.
{¶25} In the instant case, the Note contained a definition of the ceiling rate, or a cap on the adjustable interest rate. The ceiling rate was defined as: “the greater of (a) 130% of the average auction yield for six months U.S. Treasury bills [“Cap A“] or (b) three percent (3%) over the rate for six month advances from the Federal Home Loan Bank of Cincinnati [“Cap B“] ***.” (Emphasis added.)
{¶27} It is well-settled that this court must examine the contract as a whole. When the Note in this case is viewed as a whole, it becomes apparent there is no ambiguity. Interpreting Cap B as 103% would render an internally inconsistent interpretation, as Cap A specifically refers to “130% of the average auction yield for six months U.S. Treasury bills.” (Emphasis added.) If the drafters intended “three percent (3%) over the rate” to mean 103%, they would have used the actual figure, i.e. 103%, to remain consistent with the numerical phraseology employed in Cap A.
{¶28} Further, the definition of the ceiling rate specifically applies to the “greater” of two options. The Gates’ interpretation would render meaningless portions of the Note. For example, if we were to accept the Gates’ argument, Cap B would be superfluous, since Cap A would always be greater than Cap B. The Supreme Court of Ohio has held that, when interpreting a contract, a court is to presume that words are used for a specific purpose, and a court should avoid interpretations that render portions meaningless or unnecessary. Farmers Natl. Bank v. Delaware Ins. Co. (1911), 83 Ohio St. 309, paragraph six of the syllabus.
{¶29} We further presume that the intent of the parties is reflected in the language used in the Note. Although Mr. Gates maintains an ambiguity exists with regard to Cap B of the Note, executed in 1981, he testified that the “analysis of the three percent” was not formulated until after the instant lawsuit was filed. Moreover, the Gates do not take issue with the Rider to the Note which provides that they will receive
{¶30} Additionally, with regard to the definition of the ceiling rate contained in the Note, the Gates’ expert, Mr. Frank D‘Amico, testified to the following:
{¶31} “Q: ‘Or’ which means there‘s two ceilings, either one. ‘Or three percent over the rate for the six-month advances for the Federal Home Loan Bank of Cincinnati.’ Do you see that?
{¶32} “***
{¶33} “Q: Did you know what the six-month advances for the Federal Home Loan Bank of Cincinnati were?
{¶34} “A: No, I didn‘t.
{¶35} “Q: Let‘s assume that it was eight percent. Okay?
{¶36} “A: Okay.
{¶37} “Q: What is the percentage, the three percent over eight percent? How many percent would that be?
{¶38} “A: Three percent over the six-month rate would be 11 percent, I would assume.”
Unconscionability
{¶40} Unconscionability
{¶41} Under the first assignment of error, the Gates argue that Cap B is “unconscionable because the index therein was frequently not available to the general public or to [AmTrust].”
{¶42} “An unconscionable contract clause is one in which there is an absence of meaningful choice for the contracting parties, coupled with draconian contract terms unreasonably favorable to the other party.” Eagle v. Fred Martin Motor Co., 157 Ohio App.3d 150, 2004-Ohio-829, at ¶30. An arbitration provision can be rendered invalid where a party demonstrates the provision is both procedurally and substantively unconscionable. Featherstone v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 159 Ohio App.3d 27, 2004-Ohio-5953, at ¶13.
{¶43} In Collins v. Click Camera & Video, Inc. (1993), 86 Ohio App.3d 826, 834, the Second Appellate District explained substantive unconscionability in the following manner:
{¶44} “Substantive unconscionability involves those factors which relate to the contract terms themselves and whether they are commercially reasonable. Because the determination of commercial reasonableness varies with the content of the contract terms at issue in any given case, no generally accepted list of factors has been developed for this category of unconscionability. However, courts examining whether a particular limitations clause is substantively unconscionable have considered the
{¶45} Collins also outlined the standard for reviewing a question of procedural unconscionability:
{¶46} “Procedural unconscionability involves those factors bearing on the relative bargaining position of the contracting parties, e.g., ‘age, education, intelligence, business acumen and experience, relative bargaining power, who drafted the contract, whether the terms were explained to the weaker party, whether alterations in the printed terms were possible, whether there were alternative sources of supply for the goods in question.‘” (Citations omitted.) Id. at 834.
{¶47} As noted, unconscionability is, in effect, a conjunctive test. Therefore, in order to find a contract or a clause in the contract to be unconscionable, one must allege and prove both substantive and procedural unconscionability. The Gates’ theory that Cap B of the Note was substantively and procedurally unenforceable was first raised in their memorandum in opposition to AmTrust‘s motion for summary judgment. The Gates failed to assert this legal theory of unconscionability in their original or amended complaint. Alden v. Kovar, 11th Dist. Nos. 2007-T-0114 and 2007-T-0115, 2008-Ohio-4302, at ¶64-73. Thus, it was not before the trial court. In the interest of justice, however, we will address the Gates’ first assignment of error.
{¶48} In their brief, the Gates failed to identify evidence in the record that would demonstrate there is a genuine issue of material fact. Their argument is devoid of any evidence that would demonstrate Cap B satisfies both prongs of the test for
{¶49} First, the terms of the Note at issue do not meet the test for substantive unconscionability. Unlike the contracts in Preston, supra, the Note at issue did not provide AmTrust unfettered discretion in increasing or decreasing the rate of interest. While the interest rate could fluctuate, its calculation was specifically defined within the Note. Also, the Note set forth definable parameters, clearly establishing the ceiling rates upon which the index could not rise above.
{¶50} Moreover, a review of the record reveals that the Gates cannot point to any evidence of procedural unconscionability. Mr. Gates received a bachelor of arts degree in business education and later took courses in engineering. Mr. Gates esteemed himself as a “successful real estate developer” and has owned, operated, and sold businesses in the past and had past business dealings with at least four different financial institutions.
Implied Covenant of Good Faith and Fair Dealing
{¶52} Implied Covenant of Good Faith and Fair Dealing
{¶53} In the third assignment of error, the Gates argue the trial court erred in enforcing Cap B, since AmTrust‘s calculation of periodic interest breached its obligation of good faith and fair dealing. We do not agree.
{¶54} In Westwinds Dev. Corp. v. Outcalt, 11th Dist. No. 2008-G-2863, 2009-Ohio-2948, at ¶89, this court recognized that the covenant of good faith is part of a contract claim and, thus, it cannot stand alone as a separate cause of action. (Citation omitted.)
{¶55} As we have previously found that the trial court did not err in dismissing the Gates’ breach of contract claim, the Gates cannot maintain a separate claim for breach of implied covenant of good faith and fair dealing. As such, the Gates’ third assignment of error is not well-taken.
{¶56} For the reasons stated in the Opinion of this court, the assignments of error are without merit. It is the judgment and order of this court that the judgment of the Geauga County Court of Common Pleas is affirmed.
CYNTHIA WESTCOTT RICE, J., concurs,
COLLEEN MARY O‘TOOLE, J., concurs in judgment only.