Moon v. Milestone Financial, LLC

EDWARD J. EMMONS, CLERK (9 □ □□ □□□ ONG U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA le ay Sal □□ 1 . □□□ □ □□ Signed and Filed: January 31, 2022 □□□□ OL [2] Grin J 2 4 Vin An 0 5 DENNIS MONTALI U.S. Bankruptcy Judge [6] 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA [9] In re ) Bankruptcy Case No. 20-30711-DM 10 ) 11 MARK E. MOON, ) Chapter 11 ) 12 ) Debtor. ) 13 ) 14 E. MARK MOON and LORI MOON, ) Adversary Case No. 20-03117-DM ) 15 Plaintiffs, ) ) 16 V. ) 17 ) MILESTONE FINANCIAL, LLC, et ) 18 ) ) 19 Defendants. ) ) 20.) Om" 21 MEMORANDUM DECISION REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT [22] 23 I. INTRODUCTION 24 The following decision deals with the complex world of 25 ||California’s usury law and its piecemeal exemptions. 26 ||Incongruous as a result may be, “. . . we must take the usury 27 ||law as we find it. Indeed, the usury law is complex and is 28 |}riddled with so many exceptions that the law's application =- 1 =- 1 itself seems to be the exception rather than the rule.” Ghirardo 2 v. Antonioli, 8 Cal.4th 791, 807 (Cal. 1994) (“Ghirardo”). 3 This appears to be both a case of first impression and one of 4 the rare instances in which application of usury law must apply 5 with no applicable exemptions. 6 II. THE LOAN AND EXTENSION 7 On June 23, 2015, Plaintiffs Mark E. Moon and Lori Moon 8 (“Moons” or “Plaintiffs”) entered into a hard money loan 9 agreement (the “Original Loan”) with Defendant Milestone 10 Financial, LLC (“Milestone”) secured by the Moons’ residence. 11 At that time, Milestone did not have either a real estate broker 12 license or a mortgage loan originator license and had been 13 warned by the State of California about its lack of appropriate 14 licenses.1 The Moons were represented by licensed real estate 15 broker Marc Fournier. 16 One of the loan documents signed by the Moons was a 17 certification that the loan was a business or investment purpose 18 loan, meaning the protection found in the Truth in Lending Act 19 or other California laws meant to protect residential home loan 20 borrowers would not apply.2 The Original Loan was for $759,000 [21] 22 1 In March and April of 2015, the California Department of Real Estate issued Cease and Desist Orders to Milestone and related 23 parties. These Orders demanded in part that Milestone “desist and refrain from soliciting borrowers and/or performing services [24] for borrowers or lenders in connection with loans secured 25 directly or collaterally on real property” until such licenses were obtained. See Plaintiffs’ RJN, Dkt. 40. [26] 2 Milestone makes much of the Moons’ alleged misstatement of the [27] purpose of the loans, and Moons make much of Milestone’s alleged 28 last-minute insertion of documents to make a residential loan 1 with an interest rate of 11.3%, a default interest rate of 17.3% 2 plus late fees, and interest-only payments of over $7,000 per 3 month until the balance came due in July 2017. 4 The Moons signed the Promissory Note. (Dkt. 1-26). 5 Paragraph 2, titled “Payments,” makes clear that the Original 6 Loan is payable in full on the Maturity Date, and will include 7 the entire principal, unpaid interest, and any other costs at 8 that time.3 Paragraph 4(a), titled “Late Charges; Default Rate” 9 states that should the Moons fail to make a monthly payment 10 within 10 days of the due date, a late charge (the “Late 11 Charge”) equal to 10% of the monthly payment will be assessed as 12 a late charge, and “it is extremely difficult and impractical to 13 ascertain the extent of such damages and that the Late Charge 14 represents a fair and reasonable estimate, considering all of 15 the circumstances on the date of the Execution of this Note, of 16 the costs the Holder will incur by reason of such late payment” 17 (emphasis added). 18 Paragraph 4(b) reiterates the difficulty of ascertaining 19 the damages associated with the loss of timely payments as the 20 reason for the default interest rate set by the Promissory Note. [21] 22 appear to be a business loan on paper. Ultimately, the dispute over which party misled the other regarding the purpose of the 23 loan is a matter waived by terms of the Extension. 24 3 Paragraph 2(a) says, in part: “The entire unpaid Principal 25 Balance, plus accrued interest and other amounts payable under the Loan Documents, shall be due and payable in full on the 26 Maturity Date.” Paragraph 2(c) says, in part: “THIS LOAN IS PAYABLE IN FULL ON THE MATURITY DATE SET FORTH HEREIN.” 27 (Emphasis in original). It goes on to state that a substantial portion of the original principal sum will be due at maturity [28] “IN THE FORM OF A BALLOON PAYMENT” (emphasis in original). 1 Nowhere in Paragraph 4 is there any language regarding a late 2 charge on the balloon payment itself. 3 Paragraph 14, titled “Usury”, contains a usury savings 4 clause that limits the interest charged to the applicable 5 statutory rate in the event that a court holds the amount of 6 interest charged “is in excess of applicable law.” 7 The Moons began to struggle with payments almost 8 immediately. At some points, Milestone advanced the taxes and 9 insurance on the residence. About one year after the making of 10 the Original Loan, on August 26, 2016, the Moons and Milestone 11 entered into an agreement titled “Settlement Agreement, 12 Indemnity, and First Amendment to Promissory Note Secured by 13 Deed of Trust” (the “Extension”) (Dkt. 1-27, 28)4. The Extension 14 supplemented and amended the Original Loan. It did not replace 15 it. 16 Milestone still did not have its own real estate broker or 17 loan originator license, and this time the Moons were not 18 represented by Mr. Fournier or any licensed real estate broker 19 in the making of the Extension. The Extension states that the 20 unpaid principal balance of the loan is $902,525.34 in no fewer 21 than three parts of the document. The Extension extended the 22 Maturity Date of the loan to July 2019, slightly lowered the 23 initial interest rate to 11.05% and increased the monthly [25] 26 4 At that time there was no real dispute between the parties, so it is unclear why Milestone chose to call the agreement a 27 “Settlement”. Perhaps calling it the “Forbearance” that it was invites invocation of the usury law that ultimately doomed its [28] strategy. 1 payments and default interest rate. Paragraph 8 of the 2 Extension, titled “Late Charges,” stated: 3 Should any payment due hereunder not be 4 received on or before the TENTH (10th) day 5 after its due date (the ‘Grace Period’), 6 Borrower shall immediately pay to Lender, 7 without notice or demand by Lender, a late 8 charge calculated at TEN PERCENT (10.00%) of 9 any payment then due, including the final 10 (balloon) payment.” 11 Dkt. 1-28, p. 2 (emphasis in original). 12 The charge on the final balloon payment was a new addition 13 to the Extension, not part of the Original Loan. Within the 14 same paragraph, the basis for these late charges was made clear: 15 Borrower agrees that Lender will incur 16 administrative costs and other damages not 17 compensated by payment of interest as a result 18 of any payment not being made when due and 19 acknowledges that calculation of actual 20 damages is extremely difficult and 21 impracticable and that the foregoing amount is 22 a reasonable estimate of those damages. 23 After executing the Extension, the Moons promptly began 24 missing loan payments, though some payments were tendered at 25 various times. 26 In March 2019, the Moons sought to refinance their 27 residence with a different lender and requested a payoff amount 28 from Milestone. Milestone provided a payoff quote of 1 $1,288,792.28, which included what was initially called a 2 “prepayment penalty” of $115,615.06. In later filings Milestone 3 notes the phrase “prepayment penalty” was in error, and the 4 amount represents a late charge on the principal balance in 5 accordance with the Extension. The payoff was much higher than 6 what the Moons had anticipated, and they were ultimately unable 7 to refinance the loan. 8 III. PROCEDURAL HISTORY 9 On November 18, 2019, the Moons filed a complaint in San 10 Mateo superior court against Milestone, William R. Stuart 11 (“William Stuart”); Bear Bruin Ventures, Inc. (“Bear Bruin”); 12 and Evergreen Escrow, Inc. (“Evergreen”) (collectively, 13 “Defendants”). On February 14, 2020, the Moons filed an Amended 14 Complaint against the same Defendants. The Amended Complaint 15 seeks damages against the Defendants on four counts of alleged 16 wrongdoing: 17 1. Declaratory Relief to determine the rights and 18 obligations of the Moons under the Extension; 19 2. Breach of Contract against Milestone; 20 3. Fraud against Stuart, Milestone, and Bear Bruin; 21 4. Intentional Interference with a Contract by 22 Milestone and Evergreen. 23 While the lawsuit was pending, Milestone began foreclosure 24 proceedings. After originally issuing a temporary restraining 25 order, the state court eventually denied the Moons’ Motion for 26 Preliminary Injunction on September 4, 2020. On September 10, 27 2020, the Moons filed a Notice of Appeal but on the same day, 28 Mark E. Moon filed a bankruptcy petition. On October 16, 2020, 1 the Moons removed the Amended Complaint to this court via this 2 adversary proceeding. Evergreen was voluntarily dismissed on 3 August 12, 2021. 4 After rounds of discovery disputes and an attempt at 5 settlement via the Bankruptcy Dispute Resolution Program, the 6 Moons filed a Motion for Partial Summary Judgment on September 7 9, 2021 (Dkt. 36) (“Moon MPSJ”) and Defendants filed a Motion 8 for Summary Judgment on September 16, 2021 (Dkt. 43) (“Defendant 9 MSJ”). 10 The Defendant MSJ seeks summary judgment on each of the 11 four counts of the Amended Complaint. Anomalously, the Moon 12 MPSJ does not seek partial summary judgment on the four 13 enumerated claims of the Amended Complaint but seeks judgment on 14 three claims not found in the Amended Complaint: 15 1. The Extension violated usury law5; 16 2. Milestone demanded an illegal acceleration 17 penalty from the Moons; 18 3. Milestone illegally charged multiple late fees on 19 a single loan payment. 20 The Moons also belatedly presented a new theory of 21 interference with an economic advantage (Dkt. 49). [22] 23 5 As noted above, the Moons did not raise the matter either as a claim or defense until the Moon MPSJ. While the Court 24 recognizes that the Moons would not have been able to obtain 25 relief by default on the usury claim in the Moon MPSJ because it was not initially plead as a claim, or part of a defense, all 26 parties have briefed and treated the matter in such a way, and as such, the Court will consider the Defendants to have “entered 27 the fray” and waived any objection on the issue of usury. For that reason, the matter is ripe for decision here and in the [28] orders to follow. 1 The parties provided further briefing on the applicability 2 of this court’s decision in In re Arce Riverside LLC, 538 B.R. 3 563 (Bankr. N.D. Cal. 2015) (“Arce”) at the court’s request. 4 For the reasons explained below, the court has determined 5 that as to the Moon MPSJ, the Moons should prevail on their 6 claims regarding usury and late fees but fail on their claim 7 regarding the acceleration penalty. As to the Defendant MSJ, 8 Milestone should prevail as to the first claim for declaratory 9 relief and the Moons’ belated claim for interference with an 10 economic advantage. As to the breach of contract, intentional 11 interference with a contract, and fraud claims, disputes of 12 material fact remain to be resolved, and summary judgment must 13 be denied. 14 IV. STANDARDS GOVERNING MOTIONS FOR SUMMARY JUDGMENT 15 On a motion for summary judgment, the court must determine 16 whether, viewing the evidence in the light most favorable to the 17 nonmoving party, there are any genuine issues of material fact 18 as to any claim, part of claim, defense, or part of defense. 19 Simo v. Union of Needletrades, Indus. & Textile Employees, 322 20 F.3d 602 , 609-10 (9th Cir. 2003); Fed. R. Civ. P. 56. Summary 21 judgment against a party is appropriate when the pleadings, 22 depositions, answers to interrogatories, and admissions on file, 23 together with the affidavits, if any, show that there is no 24 genuine issue as to any material fact and that the moving party 25 is entitled to judgment as a matter of law. Fed. R. Civ. P. 56. 26 Usury may be presented as either a claim or affirmative 27 defense under California law. See Korchemny v. Piterman, 68 Cal. 28 5th 1032 (2021). 1 V. DISCUSSION 2 A. Usury Law and Exemptions 3 The Moon MPSJ asserts that by virtue of the Extension, 4 Milestone charged interest in violation of the California usury 5 law. The California Constitution fixes the maximum annual 6 interest rate at 10% for “any loan or forbearance of any money, 7 goods, or things in action.” Cal. Const. Art. XV § 1. 8 “The conscious and voluntary taking of more than the legal rate 9 of interest constitutes usury and the only intent necessary on 10 the part of the lender is to take the amount of interest which 11 he receives; if that amount is more than the law allows, the 12 offense is complete.” Ghirardo at 798, quoting Thomas v. Hunt 13 Mfg. Co. 42 Cal. 2d 734, 740 (Cal. 1954). “The essential 14 elements of usury are: (1) The transaction must be a loan or 15 forbearance; (2) the interest to be paid must exceed the 16 statutory maximum; (3) the loan and interest must be absolutely 17 repayable by the borrower; and (4) the lender must have a 18 willful intent to enter into a usurious transaction.” Ghirardo 19 at 798 (emphasis added). On its face, therefore, the Original 20 Loan violated the usury law unless an exemption saved it. 21 There are multiple exemptions to California’s usury law, 22 including loans made by nationally chartered banks and certain 23 licensed businesses, Cal. Fin. Code § 22050 , and pawnbrokers, [24] Cal. Bus. And Prof. Code § 21626 . These and other exemptions 25 are not at issue here. The only exemption which is potentially 26 applicable is Cal. Civ. Code § 1916.1 (“§ 1916.1”), which deals 27 with loans or forbearances arranged by licensed real estate 28 brokers: 1 For the purposes of this section, a loan or 2 forbearance is arranged by a licensed real 3 estate broker when the broker: 4 (1) acts for compensation or in expectation of 5 compensation for soliciting, negotiating, or 6 arranging the loan for another, 7 (2) acts for compensation or in expectation of 8 compensation for selling, buying, leasing, 9 exchanging, or negotiating the sale, purchase, 10 lease, or exchange of real property or a 11 business for another and 12 (A) arranges a loan to pay all or any 13 portion of the purchase price of, or of 14 an improvement to, that property or 15 business or 16 (B) arranges a forbearance, extension, or 17 refinancing of any loan in connection 18 with that sale, purchase, lease, exchange 19 of, or an improvement to, real property 20 or a business, or 21 (3) arranges or negotiates for another a 22 forbearance, extension, or refinancing of any 23 loan secured by real property in connection 24 with a past transaction in which the broker 25 had acted for compensation or in expectation 26 of compensation for selling, buying, leasing, 27 exchanging, or negotiating the sale, purchase, [28] 1 lease, or exchange of real property or a 2 business. [3] Cal. Civ. Code § 1916.1 (emphasis added). “A forbearance is 4 an agreement not to insist upon payment at the date of maturity 5 of a debt, or the giving of further time to pay.” Arce, at 571, 6 citing Buck v. Dahlgren, 23 Cal. App. 3d 779, 785 (Cal. Ct. App. 7 1972). A forbearance can be agreed upon before the debt comes 8 due, see, e.g., Jones v. Wells Fargo Bank, 112 Cal. App. 4th 9 1527 (Cal. Ct. App. 2003) (forbearance arranged months prior to 10 Maturity Date of loan). 11 Here, the Extension modified the Original Loan in some 12 ways, including by extending the Maturity Date. It also lowered 13 the interest rate slightly, but not below the maximum permitted 14 by usury law if not eligible for an exemption. The Extension 15 must be considered a forbearance even if the parties neglected 16 to call it by its name. 17 “Note that there are only two instances of forbearance 18 mentioned [in § 1916.1]: in connection with a sale and in 19 connection with a past sale in which the broker acted as such.” 20 Arce, 538 B.R. at 574. Neither applies here. The statute 21 “provides a restricted definition of the term “arranged” in 22 relation to a forbearance.” The Law of Usury, Miller and Starr 23 California Real Estate 4th § 37:6. The statute painstakingly 24 sets forth the instances in which a forbearance negotiated by a 25 real estate broker would be exempt under usury law: when that 26 broker was previously involved in arranging the original loan 27 and that loan was in connection with a sale, lease, or other 28 transaction, or when that broker had previously arranged for the 1 sale, lease or other transaction for compensation. 2 § 1916.1(2)(B), (3). Conspicuously absent from those instances 3 is a scenario in which a forbearance is arranged on a simple 4 loan of money secured by real estate, with no other sale, lease, 5 or other transaction involved. This court cannot create an 6 exemption here to save Milestone. 7 Mr. Fournier, the licensed real estate broker involved in 8 the making of the initial loan, was not involved in the 9 Extension. While Milestone belatedly attempts to argue that 10 Carolyn Stuart, one of Milestone’s owners, was a licensed broker 11 involved in the creation of the Extension, this assertion is 12 contradicted by Milestone’s own prior documents, which show 13 absolutely no involvement by Ms. Stuart in the making of the 14 Extension. No licensed real estate broker was involved in the 15 making of the Extension. However, whether a real estate broker 16 (including Ms. Stuart) was involved in the making of the 17 Extension is ultimately an immaterial fact, because the 18 Extension is a forbearance of a type which falls outside of 19 California’s carefully crafted usury exemptions. 20 i. Ghirardo Involves a Credit Sale, Not a 21 Forbearance 22 Milestone relies on Ghirardo6 for the proposition that the 23 Extension is neither a loan or forbearance and therefore outside 24 the bounds of usury law. [25] 26 6 Milestone also relies on DCM Partners v. Smith, 228 Cal. App. 3d 729 , 278 Cal. Rptr. 778 (1991). DCM contains facts and 27 reasoning nearly identical to Ghirardo. Any analysis of Ghirardo here is equally applicable to DCM. [28] 1 In Ghirardo, the defendant Antonioli7 purchased real 2 property in a seller-financed transaction (also known as a 3 credit sale) in which a promissory note was executed in favor of 4 the sellers. Antonioli then sold the property to another party, 5 who then sold the property to plaintiff Ghirardo via another 6 seller-financed transaction, in which Ghirardo would pay his 7 seller, and that seller would then pay Antonioli. A payment 8 dispute arose. Ghirardo and Antonioli came to a settlement 9 which cut out the middleman and increased the interest rate. 10 Later, Ghirardo sued Antonioli for charging a usurious interest 11 rate on the new note. The Ghirardo court explained the 12 negotiated promissory note fell outside usury law entirely, 13 because the original transaction was a credit sale, not a loan 14 or forbearance. In a credit sale, “the seller finances the 15 purchase of property by extending payments over time and 16 charging a higher price for carrying the financing. This type 17 of transaction . . . is not subject to the usury law because it 18 does not involve a loan or forbearance." Ghirardo at 803 19 (quoting Southwest Concrete Products v. Gosh Construction Corp. [20] 51 Cal. 3d 701, 705 (Cal. 1990)). Ghirardo argued the modified 21 promissory note resulted in a forbearance. The court disagreed. 22 Simply put, a re-negotiated credit sale is still a credit sale. 23 It was not a loan. 24 Milestone likens the Extension to the type of settlement 25 found in Ghirardo: an agreement which is not a loan or [26] 27 7 The Defendants were a married couple, the Antoniolis. The California Supreme Court referred to the Antoniolis in the [28] singular, so this Court does so as well. 1 forbearance and therefore falls outside of usury entirely. 2 However, the facts of this case are much closer to what this 3 court previously encountered in Arce, which involved a simple 4 loan secured by real estate, and a subsequent forbearance that 5 ran afoul of § 1916.1. For the reasons set forth above, the 6 Extension is likewise a forbearance. It was not the extension 7 of a credit sale and is thus not comparable to Ghirardo. 8 Milestone’s assertion that the Extension is something other than 9 a forbearance is incorrect. The most critical element—a loan of 10 money followed by a forbearance—was what this was. 11 ii. The Extension is Not Exempt Simply Because the 12 Original Loan was Exempt 13 Milestone also relies on Ghirardo for the premise that an 14 originally non-usurious transaction cannot be transformed into a 15 usurious transaction at a later point. This again is a 16 misstatement of Ghirardo, which involved a type of transaction 17 that fell outside of usury because it was not a loan in the 18 first instance. No modification of that agreement could 19 transform the transaction into a loan or forbearance of a loan. 20 The reliance on Ghirardo is also an incorrect statement of 21 law, since non-usurious loans can be transformed into usurious 22 forbearances under certain circumstances. For instance, in 23 Arce, an originally non-usurious loan was transformed into a 24 usurious forbearance due to the increased interest rate and the 25 absence of any statutory exemption such as involvement of a 26 licensed real estate broker. Upon determining that the 27 modification was a forbearance, this court concluded that the 28 forbearance did not fall within the exemptions of § 1916.1. 1 Were that so, the increased interest would not have violated 2 usury law. Despite the anomalous result, this court reasoned 3 that the Legislature “knew what it was saying and meant what it 4 said” when it limited the real estate broker exemption to 5 forbearances only in very limited contexts. Arce, 538 B.R. at 6 674. 7 Here, the loan providing for interest above ten percent is 8 unlike Ghirardo (a credit transaction) or Arce (originally below 9 ten percent). The loan was not non-usurious, but rather a 10 usurious loan subject to an exemption. The difference between a 11 non-usurious loan and a loan subject to an exemption is slight 12 but distinct, and not just a matter of semantics. One is 13 outside of usury law entirely, and the other is within usury law 14 but subject to an exemption to that law. Once the exemption (no 15 real estate broker involved) ceased to apply, the exemption 16 disappeared, and the transaction became subject to the full 17 consequences of the usury law. 18 The California General Assembly enacted § 1916.1 on the 19 basis that “real estate brokers are qualified by the state on 20 the basis of education, experience, and examination, and that 21 the licenses of real estate brokers can be revoked or 22 suspended.” Cal. Stats 1983 Ch. 307, Sec. 2. The legislature 23 was careful to only exempt those forbearances that were in 24 connection with sales, leases, or other exchanges of property. 25 The Extension does not fit within the exemption for 26 forbearances set forth in § 1916.1. A loan broker was not 27 involved in the making of the Extension, and even so, the 28 Extension was not in connection with a sale, lease, or other 1 type of exchange of property. It makes no difference that the 2 Extension slightly lowered the interest rate of the Original 3 Loan: the bright lines of § 1916.1 are clear. The law is 4 equally clear that it does not matter if a creditor intended to 5 stay within the usury exemption, and if the intent to loan a 6 usurious amount of interest exists without an exemption, then 7 the element of intent to commit usury has been met. 8 While the outcome may seem harsh, the court and the parties 9 must keep in mind that the goal of all usury law is to prevent 10 the making of usurious loans. Hard-money lenders have options 11 if they are not eligible for the protection of § 1916.1. 12 Milestone had the option to get licensed, lower the interest 13 rate, or foreclose on the property, however unappealing and 14 consequential that would have been to the Moons. 15 The Extension’s interest rate and default interest rate 16 both violated California’s usury law. Due to Milestone’s 17 violation of usury law, Milestone is entitled only to the 18 principal balance of the Extension minus the amount of usurious 19 interest paid. See, e.g., Westman v. Dye 214 Cal. 28 , 31–38 20 (1931); District Bond Co. v. Haley (1935) 2 Cal. 2d 308, 311 ; 21 Shirley v. Britt 152 Cal. App. 2d 666, 670 (Cal. Ct. App. 1957); 22 Korchemny v. Piterman, 68 Cal. App. 5th 1032 , 1043 (Cal. Ct. 23 App. 2021 ). 24 B. The 10% Fee on the Balloon Payment 25 Next, the Moons’ MPSJ argues that the $115,615.06 charge 26 associated with a 10% fee on the Moons’ balloon payment, 27 initially called an “acceleration penalty” by Evergreen, was an 28 unlawful penalty. This penalty was not part of the Original 1 Loan but was inserted into the terms of the loan by the 2 Extension. Milestone contends the fee was a bargained-for and 3 reasonable estimated amount of liquidated damages. 4 Both parties frame the issue of whether the 10% fee on the 5 balloon is permissible in the context of liquidated damages. 6 Upon its previous finding of usury, the court must first 7 consider whether such the 10% fee should be deemed to be part 8 and parcel of the interest the court has found to be usurious. 9 The court concludes that the fee should be deemed separate from 10 the interest (and default interest) set forth in the Loan and 11 the Extension. 12 “Interest is the compensation allowed by law or fixed by 13 the parties for the use, forbearance, or detention of money.” [14] Cal. Civ. Code § 1915 . Liquidated damages are a pre-set measure 15 of damages agreed upon by parties to a contract “[t]o avoid 16 uncertainty and the cost of litigation if a breach occurs.” 17 Poseidon Development, Inc. v. Woodland Lane Estates, LLC, 152 18 Cal. App. 4th 1106, 1115 (2007) (internal citations omitted). 19 The court concludes that the liquidated damages provision of the 20 Extension stands separately from the interest charged by the 21 Extension. Even if the loan were not deemed to be usurious, the 22 court would still need to determine whether the liquidated 23 damages provision, which is pegged solely to the principal 24 balance of the Extension, is permissible. 25 “A provision in a contract liquidating the damages for the 26 breach of the contract is valid unless the party seeking to 27 invalidate the provision establishes that the provision was [28] 1 unreasonable under the circumstances existing at the time the 2 contract was made.” Id., quoting Cal. Civ. Code § 1671 (b). 3 “A liquidated damages clause will generally be considered 4 unreasonable, and hence unenforceable under section 1671(b), if 5 it bears no reasonable relationship to the range of actual 6 damages that the parties could have anticipated would flow from 7 a breach.” Krechuniak v. Noorzoy, 11 Cal. App. 5th 713 , 722 8 (2017) (citing Ridgley v. Topa Thrift & Loan Ass’n, 17 Cal. 4th 9 970, 977 (1998)). Whether the damages are reasonable under 10 circumstances is a “question of law when the facts are 11 undisputed and susceptible of only one reasonable 12 interpretation.” Krechuniak at 723 . 13 In Poseidon, the parties executed a promissory note that 14 provided for interest-only monthly payments, and a final balloon 15 payment. The promissory note stated that because any late 16 payments would cause the lender to incur costs that would be 17 “difficult or otherwise impractical to assess,” a 10% fee would 18 be imposed on every late-paid installment. The note was silent 19 as to whether this fee applied to the balloon payment when due. 20 The court found that even though a balloon payment may be 21 considered an “installment,” the 10% fee as applied to the 22 balloon payment would be an unenforceable penalty under Cal. 23 Civ. Code § 1671(b). 24 The original Promissory Note was like Poseidon, providing 25 for late charges only on installment payments. The Extension, 26 drafted without a broker, modified the language to include a 27 late charge on top of the balloon payment. [28] 1 While the language of the liquidated damages clause in both 2 the Promissory Note and in the Extension states that calculation 3 of damages is extremely difficult, that does not explain why a 4 new 10% charge on a hefty balloon payment would suddenly be 5 necessary to make Milestone whole in the event of default. 6 Milestone is fully able to calculate the unpaid principal it is 7 owed and the advances in taxes and insurance it made. Milestone 8 argues that the 10% fee also contemplates the lost points and 9 profit it would have made had it been able to re-lend the money 10 owed. This belated suggestion of damages does not account for 11 the 10% being chargeable whether the Moons were one day late or 12 many months late. Dobson Bay Club IIDD, LLC v. La Sonrisa de 13 Diena, LLC, 242 Ariz. 108 (Ariz. 2017) (finding a 5% fee on a 14 loan’s balloon payment to be an unenforceable penalty). 15 Accordingly, the $115,615.06 is an illegal penalty under [16] Cal. Civ. Code § 1671 (b).8 17 C. Multiple Late Charges 18 The Moon MPSJ alleges that Milestone violated Cal. Civ. 19 Code § 2954.4, which addresses “late payment charges on real 20 estate loans encumbering single-family owner-occupied 21 dwellings.” This law provides that “[a] charge may not be 22 imposed more than once for the late payment of the same 23 installment. . . For the purposes of determining whether late 24 charges may be imposed, any payment tendered by the borrower 25 shall be applied by the lender to the most recent installment [26] 8 The court also presumes, but need not decide, that the fee on 27 the balloon is also an illegal usury amount, similar to the “bonus” that was disallowed as usurious in Jones v. Dickerman, [28] 114 Cal. App. 357 (1931). 1 due.” Cal. Civ. Code § 2954.4 (a)-(b). Loans arranged by a 2 licensed real estate broker are exempt from this law. Sec. 3 2954.4(e). 4 Milestone does not dispute that its late fee practices 5 would contravene § 2954.4, if not for the exemption provision of 6 subsection (e). Unlike § 1916.1, § 2954.4 does not provide for 7 specific instances in which forbearances must be treated 8 differently. 9 Thus, because the Original Loan undisputedly involved a 10 real estate broker, § 2954.4 does not apply to the late fees 11 charged on either the Original Loan or the Extension. 12 The court agrees with Milestone’s assessment. Even the 13 Moons’ Reply (Dkt. 61) indicates agreement with Milestone and 14 states that “[t]here is only one loan in this case, the June 15 2015 $795,000 loan that is secured by the 2015 Deed of Trust. 16 The September 2016 document by its terms, is an extension of 17 that June 2015 loan. There is only one loan and all the 18 payments by the Moons are covered by § 2954.4.” (Dkt. 61 at 13). 19 There is no factual dispute here. Both parties agree that 20 the Original Loan brokered by Mr. Fournier controls. 21 Accordingly, the court concludes as a matter of law that 22 the late fee exemption of § 2954.4(e) applies to the Extension. 23 Milestone is entitled to recover its unpaid late charges. 24 D. Declaratory Relief 25 A party to a contract may seek declaratory relief in a 26 California state court to determine each party’s rights and 27 obligations under a contract. Cal. Code Civ. Proc. § 1060. This 28 relief is sought by the Moons in the Amended Complaint. Such 1 relief is too generalized when applied to the facts presented, 2 and the types of rights and obligations which each party seeks 3 to clarify are addressed by the rest of this decision. The 4 Moons are not entitled to any recovery on their First Count of 5 the Amended Complaint, and Milestone is entitled to partial 6 judgment on that claim. 7 E. Breach of Contract 8 “A breach of contract is the wrongful, i.e., the 9 unjustified or unexcused, failure to perform the terms of a 10 contract.” Chen v. Paypal, Inc., 61 Cal. App.5th 559, 570 11 (2021). The Amended Complaint alleges that Milestone breached 12 its contract with the Moons “by demanding a payoff amount far in 13 excess of the amount required by any contract, and demanding 14 amounts that were illegal under the law” (Dkt 1-7, pg. 6). 15 The Extension entered by the Plaintiffs released any and 16 all claims in existence prior to September 1, 2016. Any breach 17 of contract relating to acts by Milestone prior to the Extension 18 has been waived. 19 It is an as-yet unanswered question whether the payoff 20 requested in 2019 was indeed in excess of what was owed by the 21 Moons. Because the true amount of the payoff is unknown, and it 22 is a factual question as to whether an incorrect payoff 23 statement amounts to a breach on the part of Milestone, the 24 court will deny the Defendant MSJ on that portion of the Second 25 Count of the Amended Complaint. 26 F. Fraud 27 The elements of fraud are: (1) a misrepresentation (false 28 representation, concealment, or nondisclosure); (2) knowledge of 1 falsity (or scienter); (3) intent to defraud, i.e., to induce 2 reliance; (4) justifiable reliance; and (5) resulting damage. 3 Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal. 4th 979 4 (2004). The Moons allege Defendants committed fraud by inducing 5 them to enter an Extension which represented more money than 6 what the Moons owed to Milestone at the time and resulted in a 7 too-high payoff amount in 2019. As stated above, the Moons 8 knowingly released all claims related to actions taken by 9 Defendants prior to September 1, 2016. However, the same 10 material fact issue related to the breach of contract claim also 11 remains for the fraud claim: whether in 2019 Milestone knowingly 12 issued a false payoff amount to the Moons, and whether the Moons 13 knew of or relied on the falsity of the payoff amount. The court 14 will deny the Defendant MSJ on the Third Count of the Amended 15 Complaint. 16 G. Intentional Interference with a Contract 17 The elements of intentional interference with contract are 18 “(1) a valid contract between the plaintiff and a third party, 19 (2) the defendant's knowledge of that contract, (3) the 20 defendant's intentional acts designed to induce a breach or 21 disruption of the contractual relationship, (4) actual breach or 22 disruption of the contractual relationship, and (5) resulting 23 damage.” Reeves v. Hanlon, 33 Cal. 4th 1140 (2004). 24 The Moons have made a showing that there is a factual 25 dispute as to whether there was a valid contract between the 26 Moons and the third party with which the Moons were seeking to 27 refinance, and that production of such a contract is plausible. 28 Because a material fact regarding the claim is in dispute, the 1 court will deny the Defendant MSJ on the Fourth Count of the 2 Amended Complaint. 3 H. Intentional Interference with an Economic Advantage 4 The Moons attempted belatedly to insert an additional claim 5 for Interference with an Economic Advantage in their Opposition 6 to the Defendant MSJ (Dkt. 49) in case the court finds there is 7 merely a non-binding intention to enter into a contract. 8 Because such a claim was not plead in the Amended Complaint, or 9 even the Moon MPSJ, the Moons cannot prevail and must move 10 forward only on their initially plead claim for Intentional 11 Interference with a Contract. Milestone is entitled to partial 12 summary judgment on that unnumbered claim. 13 VI. DISPOSITION 14 For the foregoing reasons: 15 A. The Moon MPSJ will be GRANTED on the usury claim and on 16 the claim regarding the 10% acceleration charge on the 17 balloon payment; in all other respects it will be 18 DENIED. What the Moons have paid in interest will be 19 credited to the principal and all accrued interest, at 20 least as of the Maturity Date of the Extension, will be 21 eliminated. 22 B. Because of the usury savings clause and the unique 23 history of this case and the conduct of the parties, the 24 court will not consider punitive or other damages. 25 C. After further briefing and argument, or consent by the 26 parties, the court will determine what Milestone is 27 entitled to by way of reimbursement of taxes, insurance 28 and other advances or costs. This would result in 1 amount owing as of the July 31, 2019 Maturity Date of 2 $902,52.34 MINUS interest actually paid through July 31, 3 2019, PLUS insurance, taxes and other costs advanced by 4 Milestone. 5 D. After further briefing and argument, or consent by the 6 parties, the court will determine the amount, if any, of 7 interest accrued and owing after the Maturity Date of 8 the Extension. 9 E. The Milestone MSJ will be GRANTED, in part, on the claim 10 for late charges and on the First Count of the Amended 11 Complaint. 12 F. The Milestone MSJ will be DENIED as to the Second, 13 Third, and Fourth Claims of the Amended Complaint. 14 G. After further briefing and argument, or consent by the 15 parties, the court will issue orders consistent with the 16 foregoing. 17 **END OF MEMORANDUM DECISION** [28] 1 COURT SERVICE LIST 2 ECF Recipients