Title: Paradise Restaurant, Inc. v. Somerset Enterprises, Inc.

State: vermont

Issuer: Vermont Supreme Court

Document:

PARADISE_REST_V_SOMERSET_ENTRPRSE.95-085; 164 Vt 405; 671 A.2d 1258

[Filed 08-Dec-1995]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 No. 95-085


Paradise Restaurant, Inc.                         Supreme Court

                                                  On Appeal from
     v.                                           Bennington Superior Court

Somerset Enterprises, Inc.                        September Term, 1995



Ellen H. Maloney, J.

       Peter H. Banse of Banse & Banse, P.C., Manchester, for
  plaintiff-appellee

       Robert F. Woolmington of Witten, Saltonstall, Woolmington, Bongartz &
  Campbell, P.C. Bennington, for defendant-appellant


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.

       JOHNSON, J.  Defendant purchased a restaurant in Bennington from
  plaintiff for cash and a promissory note, and appeals from an order of the
  Bennington Superior Court granting plaintiff's foreclosure petition on the
  purchase-money mortgage securing the note.  Pursuant to a stipulation of
  the parties, the court granted defendant's motion for permission to appeal. 
  We reverse.

       The purchase and sale transaction closed on September 20, 1988.  The
  total purchase price for the restaurant was $750,000, defendant paying
  $250,000 in cash and financing the balance with a $500,000 promissory note
  secured by a first mortgage on the property.  The note provided for

       interest at the rate of nine and half (9 1/2) per annum payable as
  follows:

     A) No payments due from September 19, 1988 to July 1,
        1989.

     B) $3,132.69 including principal and interest each month

 

        payable on the first of each month from July 1, 1989 to June
        30, 1991.

     C) $5,224.95 including principal and interest each month
        payable on the first of the month from July 1, 1991 to June 30,
        2004.


  The note did not contain any provision for a balloon payment, i.e., a
  lump-sum payment of outstanding principal, at the end of the term.

       Defendant made timely payments under the note until early 1993, when
  the parties engaged in a dispute relating to parking rights on an adjacent
  parcel owned by Paradise and leased to its subsidiary.  Paradise claimed a
  breach when defendant's February 1, 1993 check was returned for
  insufficient funds, and brought the present foreclosure action.  Defendant
  answered that sufficient funds to cover the check were deposited promptly
  after the check was dishonored and there was no default, and that the
  foreclosure had been brought in bad faith, in retaliation for defendant's
  action against plaintiff's subsidiary.

       After plaintiff's motion for summary judgment was denied, defendant
  moved for a determination of the full amount of principal and interest then
  due, intending to pay the balance in full upon that determination.  The
  sole issue before the court was the amount due under the note, and there
  was agreement that as of December 31, 1993 defendant had paid plaintiff
  $231,933.06 on the note.

       It was also undisputed that both parties had allocated principal and
  interest as to each payment in exactly the same manner on their respective
  tax returns, using the straight-line method of accounting, under which the
  total payments to be made during the term of the loan were totalled, and
  the principal amount subtracted. The balance remaining was the interest to
  be paid over the term, which figure was divided by the number of years in
  the term.  The result yielded both the amount and rate of annual interest,
  which would remain constant throughout the term.  Plaintiff's accountant
  testified that it was he who suggested the straight-line method of booking
  the loan payments.  As of December 31, 1993, both parties reported the same
  amount

 

  of remaining principal on the note to the Internal Revenue Service,
  $385,256.83.

       At trial, plaintiff's accountant testified that he should have
  amortized the note at an annual rate of 9.5% using the declining-balance
  method and that under this approach the total amount due as of June 30,
  1994 was $535,276.11, rather than $361,600.75.  The accuracy of plaintiff's
  accountant's calculations under the declining-balance method was not
  disputed.  It was also undisputed that the declining-balance method did not
  comport with the payment schedule set forth in the note, and left a
  significant balloon payment at maturity.

       Defendant did not dispute that the straight-line method actually
  followed by the parties until 1993 yielded an interest rate of about 4.5%,
  rather than the 9.5% rate set forth on the face of the note.  Nevertheless,
  defendant urged the court to adopt this reading of the note in establishing
  the total amount due, arguing that plaintiff was estopped to repudiate its
  own adoption of the straight-line accounting method at all times since the
  closing.

       The court found that it was not possible to give effect to all of the
  note terms without rendering at least one of the terms inconsistent, but
  added that "[t]he 9 1/2% interest rate, however, is unambiguous and must
  clearly reflect the intent of the parties.  The straight line calculation
  results in interest at a rate of approximately 4 1/2%.  This is
  significantly lower than what the parties intended at the time of
  contracting."  The court concluded that the declining-balance methodology
  most closely reflected the parties' intentions and that the interest rate
  of 9.5% stated in the note should govern over the payment schedule stated
  therein.  The court rejected defendant's estoppel argument, concluding that
  the facts did not square with the elements we described as necessary for
  estoppel in Greenmoss Builders, Inc. v. King, 155 Vt. 1, 7, 580 A.2d 971,
  974-75 (1990).  The court adopted plaintiff's total of $535,276.11,(FN1) the
  calculation of which is not in dispute, assuming use of a declining-balance
  approach.  The

 

  present appeal followed, by stipulation of the parties and permission
  of the court.

       The parties agree that the promissory note was internally
  inconsistent, since the stated interest rate of 9.5% could not be
  reconciled with the payment schedule set forth in the note.(FN2) Defendant
  argues that the court erred in failing to resolve the inconsistency by
  following the "uniform practical construction" of the terms, which the
  parties themselves had adopted in employing the straight-line accounting of
  interest and amortization over nearly five years, and that the court erred
  in rejecting defendant's estoppel argument.

                                I.

       Defendant contends that the court erred in failing to adopt the
  "uniform practical construction" of the parties during the period of
  performance, citing 3 Corbin on Contracts Sec. 558, at 249 (1960) to the
  effect that a court is justified in adopting the practical interpretation
  that the parties themselves have given the contract.  The treatise,
  however, is clear that the principle applies only where there is an
  ambiguity in the language of an agreement.  Corbin states in text
  immediately preceding defendant's quotation that "[t]he process of
  practical interpretation and application, however, is not regarded by the
  parties as a remaking of the contract; nor do the courts so regard it." 
  Id.

 

       Cases relying on the principles underlying Sec. 558 make the same point. 
  See, e.g., Teamsters Indus. Employees Welfare Fund v. Rolls-Royce Motor
  Cars, Inc., 989 F.2d 132, 137 (3d Cir. 1993) (pension fund's failure to
  demand contributions on behalf of probationary employees relevant where
  collective bargaining agreement ambiguous as to whether such contributions
  were required); Overseas Dev. Disc Corp. v. Sangamo Constr. Co., 686 F.2d 498, 504 n.10 (7th Cir. 1982) (subsequent conduct of parties relevant where
  contract ambiguous as to whether certain rights were delegable); Chapman
  College v. Wagener, 291 P.2d 445, 448 (Cal. 1955) (where promissory notes
  departed from language of contract, subsequent conduct of parties was
  relevant to proper interpretation).

       The note in the present case is not ambiguous.  It is defective and
  incapable of consistent interpretation.  The contract might have been
  deemed implicitly modified by subsequent conduct. See Globe Transp. &
  Trading (U.K.) Ltd. v. Guthrie Latex, Inc.,