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
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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
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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