Title: Dominion Savings Bank v. Costello
Citation: N/A
Docket Number: 980758
State: Virginia
Issuer: Virginia Supreme Court
Date: February 26, 1999

Present:  All the Justices 
DOMINION SAVINGS BANK, FSB 
v. Record No. 980758  OPINION BY JUSTICE CYNTHIA D. KINSER 
 
 
 
 
 
 
 
  February 26, 1999 
C. JOHN COSTELLO 
FROM THE CIRCUIT COURT OF WARREN COUNTY 
John E. Wetsel, Jr., Judge 
 
 
In this appeal, we consider whether two notes, which 
document the terms of repayment for two first mortgage real 
estate loans, provide for payment of interest in advance or 
on arrears each month.  Because we conclude that the 
unambiguous terms of the notes provide for interest to be 
charged in advance, we will reverse the judgment of the 
circuit court finding that interest is to be paid on 
arrears. 
I. 
 
Dominion Savings Bank, FSB, (the Bank)1 made two first 
mortgage real estate loans to C. John Costello (Costello).  
The loans are evidenced by two promissory notes, each dated 
December 12, 1986.  One note is for the principal amount of 
                     
1 First Federal Savings Bank of Shenandoah Valley, now 
known as Dominion Savings Bank, FSB, was the successor-in-
interest to First Federal Savings and Loan Association of 
Front Royal, the institution designated as “Lender” in the 
two notes. 
 
$42,000, and the other note is for the principal amount of 
$133,000.2
The notes contain several provisions pertinent to this 
appeal.  In the terms regarding payments, the notes require 
Costello to “pay principal and interest by making payments 
. . . on the 1st day of each month beginning on January 1, 
1987[,]” and continuing until December 1, 2016, at which 
time any remaining amounts are to be paid in full.  The 
notes also specify that “monthly payments will be applied 
to interest before principal.”  The only difference between 
the notes is the amount of the monthly payments.  Under the 
$42,000 note, Costello’s monthly payment is $376.38; 
whereas, the monthly payment on the $133,000 note is 
$1,191.84. 
 
At the closing on both loans, Costello paid interest 
for the period from December 12 through December 31, 1986.  
He then began to make his scheduled monthly payments.3  
                     
2 Costello executed the $42,000 note personally and as 
trustee of the Druid Hill Land Trust.  Costello and his 
wife, J. Braidwood Costello, executed the $133,000 note.   
At the closing for the $133,000 loan, Costello also 
executed a federal Truth-in-Lending Disclosures statement, 
but there was no contemporaneous execution of such a 
document at the closing for the other loan. 
 
3 On May 10, 1994, Costello paid off the $133,000 note 
in full.  According to the record in this case, he 
continues to make monthly payments on the $42,000 note. 
 
 
2
Thus, when he made the initial payments on January 1, 1987, 
no interest had accrued on the loans.  The Bank applied 
those payments first to the interest that would accrue 
during the month of January 1987, and then to the 
outstanding principal balances.  The Bank applied each of 
Costello’s subsequent payments in this manner.  In other 
words, the Bank always collected interest in advance on the 
principal balances of the loans rather than on arrears. 
 
On September 9, 1996, Costello filed a motion for 
judgment in which he alleged that the Bank had misallocated 
his payments between interest and principal and thus 
overcharged him in the amount of $2,243.82 on the two 
loans.  According to Costello, the notes require that the 
Bank charge interest on arrears rather than in advance.  In 
response, the Bank asserted, inter alia, that the notes do 
provide for interest to be collected in advance.  Costello 
later amended his motion for judgment by adding a claim for 
fraud against the Bank.4
On December 17, 1997, the circuit court, after hearing 
argument from both parties,5 found that the terms of the 
                     
4 The circuit court resolved the fraud claim in favor 
of the Bank.  It is not an issue in this appeal. 
  
5 The circuit court also allowed the Bank to proffer 
evidence to show the business custom and trade with regard 
to charging interest in advance and to establish that 
 
3
notes are “clear and unambiguous” and that “[t]here is no 
provision in the payment provisions that would make this an 
interest in advance note.”  In a final order dated January 
20, 1998, the circuit court awarded judgment in favor of 
Costello in the amount of $105.98 for the overpayment of 
interest on the paid-off $133,000 note.  The court also 
reduced the outstanding principal balance on the $42,000 
note to $36,627.38 in order to adjust for portions of 
payments that the Bank previously had credited to interest 
in advance rather than on arrears.  Finally, the court 
directed that “interest shall be charged in arrears and not 
in advance” thereafter on the $42,000 note.  The Bank 
appeals. 
II. 
 
The dispositive issue in this appeal is whether the 
circuit court erred by finding that the two notes do not 
provide for interest to be paid in advance each month on 
the outstanding principal balances of the two loans.  Like 
the circuit court, we find that the terms of the two notes 
are clear and unambiguous.  “[T]he question whether a 
contract is ambiguous is one of law,” and “[a] contract is 
not deemed ambiguous merely because the parties disagree as 
___________________ 
certain documents at the loan closings also demonstrate 
that these notes provide for interest to be paid in advance 
 
4
to the meaning of the language they used to express their 
agreement.”  Ross v. Craw, 231 Va. 206, 212-13, 343 S.E.2d 
312, 316 (1986).  Furthermore, because this Court has “the 
same opportunity as the trial court to consider the words 
within the four corners” of an unambiguous contract, we are 
not bound on review by the trial court’s construction of 
that contract.  Christopher Assocs., L.P. v. Sessoms, 245 
Va. 18, 22, 425 S.E.2d 795, 797 (1993). 
“The guiding light in the construction of a contract 
is the intention of the parties as expressed by them in the 
words they have used, and courts are bound to say that the 
parties intended what the written instrument plainly 
declares.”  W. F. Magann Corp. v. Virginia-Carolina Elec. 
Works, Inc., 203 Va. 259, 264, 123 S.E.2d 377, 381 (1962).  
It is well-settled in contract law that “‘where an 
agreement is complete on its face, is plain and unambiguous 
in its terms, the court is not at liberty to search for its 
meaning beyond the instrument itself.’”  Ross, 231 Va. at 
212, 343 S.E.2d at 316 (quoting Globe Iron Constr. Co. v. 
First Nat’l Bank of Boston, 205 Va. 841, 848, 140 S.E.2d 
629, 633 (1965)).  We shall, therefore, look no further 
than the plain terms of the two promissory notes in order 
___________________ 
rather than on arrears. 
 
5
to determine whether the notes provide for payment of 
interest in advance or on arrears. 
 
Although neither of the two notes expressly uses the 
terminology “interest in advance,” the unambiguous terms of 
the notes reveal that the parties intended for the Bank to 
collect interest in advance each month.  The notes require 
Costello to “pay principal and interest by making payments 
every month.” (Emphasis added).  He is further obligated to 
“make [his] monthly payments on the 1st day of each month 
beginning on January 1, 1987,” and his “monthly payments 
[are to] be applied to interest before principal.” 
 
At the loan closings, Costello paid interest through 
the end of December 1986.  Therefore, when his first 
scheduled monthly payments were due on January 1, 1987, no 
interest had accrued.  Yet, according to the terms of the 
notes, Costello was required to pay “principal and 
interest” every month, and his payments were to “be applied 
to interest before principal.”  Construing the terms of the 
notes as a whole, as this Court must do, Westmoreland-LG&E 
Partners v. Virginia Elec. & Power Co., 254 Va. 1, 10-11, 
486 S.E.2d 289, 294 (1997), we conclude that the parties 
intended that interest would be paid in advance each month.  
A contrary decision would render meaningless the provisions 
of the notes requiring Costello to pay interest and 
 
6
principal every month beginning on January 1, 1987, and 
directing that the payments be applied first to interest 
and then to principal.  “No word or clause in the contract 
will be treated as meaningless if a reasonable meaning can 
be given to it, and there is a presumption that the parties 
have not used words needlessly.”  D.C. McClain, Inc. v. 
Arlington County, 249 Va. 131, 135-36, 452 S.E.2d 659, 662 
(1995). 
 
For these reasons, we will reverse the judgment of the 
circuit court.6
Reversed and final judgment. 
                     
6 Because of our decision on this issue, we will not 
address the Bank’s remaining assignment of error. 
 
7