Dominion Savings Bank, FSB v. Costello

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