IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
In re Receivership of JDH Investment Group, LLC No. 86303-7-I (Consolidated with JDH INVESTMENT GROUP, LLC, No. 87257-5-I)
Respondent, DIVISION ONE v. UNPUBLISHED OPINION BRIDGES WEST, LLC,
Appellant.
COBURN, J. — Bridges West, LLC purchased a promissory note from Sue Jones
after JDH Investment Group (JDH) defaulted on the note. Bridges West and JDH
disputed the interpretation of the promissory note and extension note. Bridges West
appeals the superior court’s conclusion that the note’s interest rate provision applies
only to simple interest, and that the note’s late fee provision is unenforceable. We
affirm.
FACTS
Sue Jones personally loaned JDH $2 million to purchase undeveloped property
in Auburn, Washington. In exchange, on June 11, 2013, JDH signed a promissory note, 86303-7-I /2
titled FIRST STRAIGHT NOTE, secured by a deed of trust to the Auburn property. 1
Under the terms of the note, JDH promised to pay Jones $2 million with interest from
June 14, 2013 until paid, at the rate of 12.00 percent, per annum, due on June 14,
2014. The relevant language of the note also states:
LATE CHARGE: In the event any payment is not paid within 10 days of the due date, Trustor shall pay to Beneficiary a LATE CHARGE of 6.00% of the payment due in addition to each payment due and unpaid. …
Should interest not be so paid, it shall thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note.
On the note’s due date, June 14, 2014, JDH and Jones executed a
PROMISSORY NOTE EXTENSION AGREEMENT. The parties agreed to the following:
1. PRINCIPAL BALANCE. The outstanding principal amount due under the Note is currently Two Million and 00/100 Dollars ($2,000,000.00). In addition, Two Hundred Forty Thousand and 00/10 Dollars ($240,000.00) in interest has accrued and continues to accrue under the terms of the Note.
2. DUE DATE. The Due Date as defined in the Note is hereby extended to June 14, 2015, on which date all principal and interest remaining outstanding shall be paid in full without further notice or demand.
3. INTEREST RATE. Buyer shall pay interest on the outstanding principal and accrued interest to date under the Note, at the rate of (12)% TWELVE percent per annum.
4. MISCELLANEOUS. Except as expressly modified herein, all other terms and provisions of the Note shall remain in full force and effect.
1 The note was signed by Jones as manager of JDH at that time. Thomas J. Downie is the sole owner of JDH. 2 86303-7-I /3
On August 15, 2017, Jones, at the request from JDH, presented a LOAN PAY
OFF DEMAND. The demand provided the following breakdown of the amount owed by
JDH:
ACCRUED INTEREST: Year 1 June 2013 to June 14, 2014 $240,000.00 Year 2 June 15, 2014 to June 14, 2015 $268,800.00 Year 3 June 15, 2015 to June 14, 2016 $268,800.00 Year 4 June 15, 2016 to June 14, 2017 $268,800.00 Year 5 June 15, 2017 to August 15, 2017 $ 44,922.84 Late Charge of 6% of payment due (due under extension agreement 6/14/15) $150,528.00 Principal Due $2,000,000.00
Total due on 8-15-17 $3,241,850.84
*Under Paragraph 3 of the Promissory Note Extension Agreement – interest is accruing on the outstanding principal balance and accrued interest to date at the rate of 12% per annum. The daily interest is calculated at $736.44 per day.
On August 24, 2018, Jones served JDH with an AMENDED NOTICE OF
DEFAULT, which notified JDH that the foreclosure process on the Auburn
property had begun. The notice listed the delinquent amounts as of August 23,
2018, under the “Promissory Note and Promissory Note Extension Agreement:”
Principal balance (loan matured): $2,000,000.00 Late charges due under extension agreement $150,528.00 Interest rate (12%) per annum: $1,366,014.36 June 15, 2013-August 23, 2018 (@ 736.44 per day) TOTAL PRINCIPAL, INTEREST & LATE CHARGES $3,516,542.36
In September 2019, JDH filed a petition for general receivership under RCW
7.60.025(1)(j). JDH asserted that it was unable to pay its debts and that its only asset is
the Auburn property valued at approximately $15 million. JDH listed creditors in its filed
Assignment for the Benefit of Creditors, which included Jones and the amount of $4
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million. A King County Superior Court commissioner granted JDH’s petition and
appointed a receiver to take control of JDH’s assets.
Jones submitted a creditor’s claim to the court in December 2019. The claim re-
stated the accruing interest rate on its note was 12 percent per annum and that the
interest accrued at a rate of $736.44 per day.
In March 2021, Jones sold her note to Bridges West for $3,775,000.00. The
Purchase and Sale/Assignment Agreement incorporated the following status of the loan,
as of March 15, 2021, as represented by Jones:
6. The Note/Loan is in default and has been since June 14, 2015. 7. The principal Loan Balance was initially $2,000,000 but $240,000 (first year interest) was added under the extension agreement. 8. The Note/Loan accrues interest at 12% per annum. 9. The Note/Loan has a 6% late charge provision which I have asserted.
As successor in interest to Jones, Bridges West then filed an amended secured creditor
claim. It asserted the balance owed as of March 15, 2021, was $3,784,248.12, not
including late charges, attorney fees or costs incurred. Consistent with the previous
claim, it asserted the note/loan accrued interest at the rate of 12 percent per annum.
In August 2023, the court granted the receiver’s motion for order authorizing the
sale of the Auburn property.
Bridges West filed an updated amended claim in December 2023. This time,
Bridges West calculated the amount owed by annually compounding the interest “as
provided for by the Extension and the default provision of the Note.” Bridges West
claimed the total balance owed, as of December 12, 2023, was $7,013,717. 2 JDH
2 Bridges West claimed that the accrued interest between June 14, 2014 and June 14, 2023 to be $4,209,998; and that the accrued interest between June 14, 2023 and December 14, 2023 to be $396,146 (“183 days since June 14, 2023”). The total amount included penalties, attorney fees and costs. 4 86303-7-I /5
objected to Bridges West obtaining annual compounding interest in lieu of the simple
interest on $2,240,000 as provided for in the note. JDH asserted that neither the note
nor the extension called for compounding interest. JDH also argued that the 6 percent
late fee to the final payment would operate as a penalty and, therefore, is
unenforceable.
In January, the court ruled on the objections to Bridges West’s claim and held
that the promissory note’s “interest shall accrue as simple interest at a rate of 12% per
annum, consistent with the Extension Agreement and the Purchase and Sale
Agreement of the Sue Jones Claim, signed by Bridges West.” The court also held that
the 6 percent late fee provision was unenforceable.
Bridges West appealed the court’s January ruling. JDH filed its response brief in
July and argued that the court’s order on objections is not appealable as a matter of
right under RAP 2.2(a), and that discretionary review is not warranted under RAP
2.3(b). In September, the superior court granted JDH’s motion to disburse the remaining
funds from the court’s registry and close the case. Bridges West filed a second appeal
of the court’s disbursement order. In November, Bridges West filed a motion in this
court to consolidate the two appeals because the substantive issues are the same. JDH
filed a response to the motion and took no position as to the motion to consolidate. This
court granted the motion to consolidate.
DISCUSSION
Interest Rate
The parties disagree as to the plain reading of the note and the extension
agreement. Bridges West contends that the court erred because the plain language of
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the note and extension agreement calls for compounding interest after a default. JDH
counters that the plain language of the extension establishes that only simple 12
percent interest per annum applies and that neither the note nor the extension
agreement allowed for compounded interest. We agree with JDH.
The touchstone of contract interpretation is the parties’ intention, which we follow
the “objective manifestation theory” of contracts. Hearst Commc’ns, Inc. v. Seattle
Times Co., 154 Wn.2d 493, 503, 115 P.3d 262 (2005). “Clear and unambiguous
contracts are enforced as written.” Grey v. Leach, 158 Wn. App. 837, 850, 244 P.3d 970
(2010) (citing McDonald v. State Farm Fire & Cas. Co., 119 Wn.2d 724, 733-34, 837
P.2d 1000 (1992)). We give ”words in a contract their ordinary, usual, and popular
meaning unless the entirety of the agreement clearly demonstrates a contrary intent.”
Hearst Commc’ns, Inc., 154 Wn.2d at 504. If relevant to determining mutual intent, we
may consider surrounding circumstances and other extrinsic evidence to interpret the
meaning of specific words and terms used. However, such evidence may not be used to
demonstrate an intention outside the instrument itself, nor to alter, contradict, or modify
the written terms. Hollis v. Garwall, Inc., 137 Wn.2d 683, 695-96, 974 P.2d 836 (1999).
Contract interpretation is a question of law, which we review de novo. Berg v.
Hudesman, 115 Wn.2d 657, 668, 801 P.2d 222 (1990); Keystone Masonry, Inc. v.
Garco Constr., Inc., 135 Wn. App. 927, 932, 147 P.3d 610 (2006) (absent disputed
facts, the legal effect of a contract is a question of law we review de novo).
In the state of Washington, compound interest is permitted only by explicit
language in an agreement or by statute. “To create an obligation to pay compound
interest, there must be an agreement to pay interest upon interest;…it is not enough
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that the note provides for the annual payment of interest.” Goodwin v. Nw. Mut. Life Ins.
Co., 196 Wash. 391, 404, 83 P.2d 231 (1938) (quoting Cullen v. Whitham, 33 Wash.
366, 368, 74 P.581 (1903)).
In the instant case, the parties initially agreed that JDH would pay 12 percent
interest on the $2 million principal balance, per annum, starting from June 14, 2013. The
note also provided how the interest would be calculated should JDH not pay the interest
owed:
Should interest not be so paid, it shall thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law.
The “it” refers to the interest not paid. The paragraph addresses the interest rate to be
applied to the unpaid interest and plainly includes the term “compounded.” When the
parties executed the extension agreement on the due date of the original note, they
agreed that the interest that had accrued at that point was $240,000 under the terms of
the note. It then defined the “PRINCIPAL BALANCE” under the extension agreement as
the outstanding $2 million principal under the note and the $240,000 in accrued interest.
The new “DUE DATE” became June 14, 2015. The agreed “INTEREST RATE” was 12
percent per annum applied to the outstanding principal and accrued interest “to date”
under the note. That amount was $2,240,000. Applying 12 percent to $2,240,000
equates to $268,800.
Bridges West argues that the “Interest Rate” provision in the extension
agreement “simply provided a new interest provision for when JDH wasn’t in default.”
But the interest rate from the original note and in the extension agreement continued to
be 12 percent per annum. What changed was the principal balance of which the 12
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percent interest rate applied. Instead of $2 million, the “PRINCIPAL BALANCE” became
$2,240,000. This was true whether JDH was or was not in default by the new maturity
date. The extension agreement could have defined the new principal balance, and not
have addressed the interest rate if the parties intended for all the language related to
interest on the original note to remain in effect.
Bridges West also argues that the “MISCELLANEOUS” provision in the
extension agreement supports an interpretation that the “compounded” interest
language in the initial note is still applicable. The “MISCELLANEOUS” provision
provides that “[e]xcept as expressly modified herein, all other terms and provisions of
the Note shall remain in full force and effect.” Bridges West argues that nothing in the
extension agreement supplanted the note’s interest rate default provision, and that the
extension agreement provides for the interest due by the due date.
First, the applicable interest applies “until paid” and is not limited to application
only up to the “due date.” Therefore, the suggestion that another provision is necessary
to address what the interest would be after the point of default is unpersuasive. Second,
the “INTEREST RATE” provision in the extension agreement modifies the application of
how interest is applied in the note. The original note’s provision discussing
“compounded” interest, expresses the application of interest as applied to unpaid
interest. Bridges West is correct that the note provided a 12 percent interest rate to the
$2 million principal and that the provision discussing “compounded” interest relates to
unpaid interest. The parties were free to renegotiate the terms of interest on the loan
when it entered into the extension agreement and elect not to include the provision that
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compounds interest on unpaid interest. This is consistent with the subsequent conduct
of the original parties to the contract.
JDH contends that the trial court’s decision to deny Bridges West’s claim for
compound interest is consistent with the parties’ intent and course of dealing. We agree.
A court’s purpose in interpreting a written contract is to ascertain the parties’
intent. U.S. Life Credit Life Ins. Co. v. Williams, 129 Wn.2d 565, 569, 919 P.2d 594
(1996). To facilitate in determining the contracting parties’ intent, the Court adopted the
“context rule” in Berg, 115 Wn.2d at 667. Under the context rule, extrinsic evidence is
admissible to assist the court in ascertaining the parties’ intent and in interpreting the
contract. U.S. Life Credit, 129 Wn.2d at 569. The court may consider (1) the subject
matter and objective of the contract, (2) the circumstances surrounding the making of
the contract, (3) the subsequent conduct of the parties to the contract, (4) the
reasonableness of the parties’ respective interpretations, (5) statements made by the
parties in preliminary negotiations, (6) usages of trade, and (7) the course of dealing
between the parties. Berg, 115 Wn.2d at 666-68. Such evidence is admissible
regardless of whether the contract language is deemed ambiguous. Id. at 668. Extrinsic
evidence cannot be considered: (a) to show a party’s unilateral or subjective intent as to
the meaning of a contract word or term; (b) to show an intention independent of the
instrument; or (c) to vary, contradict, or modify the written word. Hollis, 137 Wn.2d at
695. “Extrinsic evidence is to be used to illuminate what was written, not what was
intended to be written.” Id. at 697.
JDH’s reliance on extrinsic evidence to show how Jones’ course of dealing with
JDH, along with the parties’ subsequent conduct, demonstrates the parties’ intent and
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supports the trial court’s interpretation of the contracts. Jones, at JDH’s request,
presented a loan pay off demand on August 15, 2017. In the demand, Jones listed the
accrued interest from June 2013 through August 15, 2017. After June 14, 2014, the
annual accrued interest was $268,800 each full year, which is 12 percent of $2,240,000.
Jones also expressly referenced the interest rate from the extension agreement and
stated the daily interest is calculated at $736.44 per day. On August 24, 2018, Jones
served JDH an amended notice of default with an updated outstanding balance as of
August 23, 2018, and still described the daily interest as $736.44. When Jones sold her
note to Bridges West in March 2021, Jones represented that “[t]he principal Loan
Balance was initially $2,000,000 but $240,000 (first year interest) was added under the
extension agreement,” and “[t]he Note/Loan accrues interest at 12% per annum.” The
amounts Jones stated in her demands, claims and representations were consistent with
the application of simple 12 percent interest on $2,240,000, as stated in the extension
agreement. Jones never mentioned compounding unpaid interest.
Given that Jones was in the position of trying to collect on her unpaid debt, she
would have been motivated to claim a higher amount if the note supported it. JDH’s
interpretation of the contracts is reasonable. The extrinsic evidence illuminates the plain
language of the contracts and supports the trial court’s ruling that rejected the
application of compounding interest on unpaid interest.
Therefore, we agree that the plain language of the extension agreement supports
the trial court’s ruling that interest shall accrue as simple interest at a rate of 12 percent
per annum, consistent with the extension agreement and the purchase and sale
agreement signed by Bridges West.
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Late Fee
Bridges West argues that the trial court incorrectly denied them the 6 percent late
fee on the promissory note by concluding that it was a penalty.
The late fee provision provides: “In the event any payment is not paid within 10
days of the due date, Trustor shall pay to Beneficiary a LATE CHARGE of 6.00% of the
payment due in addition to each payment due and unpaid.” The trial court agreed with
JDH that the late fee amounted to a penalty and was unenforceable. The trial court did
not err.
Questions of contract interpretation are a question of law we review de novo.
Dave Johnson Ins. v. Wright, 167 Wn. App. 758, 769, 275 P.3d 339 (2012). We review
the trial court’s receivership rulings that order turnover, disallow claims, and enter
judgment, for an abuse of discretion. Matter of Applied Restoration, Inc., 28 Wn. App.
2d 881, 891, 539 P.3d 837 (2023). An abuse occurs when a decision is “‘manifestly
unreasonable, or exercised on untenable grounds, or for untenable reasons.’” Mony Life
Ins. Co. v. Cissne Family L.L.C., 135 Wn. App. 948, 952-53, 148 P.3d 1065 (2006)
(quoting T.S. v. Boy Scouts of Am., 157 Wn.2d 416, 423, 138 P.3d 1053 (2006)).
Washington courts generally uphold liquidated damages provisions unless it is
considered a penalty or determined to be unlawful. Wallace Real Estate Inv., Inc. v.
Groves, 124 Wn.2d 881, 886, 881 P.2d 1010 (1994). Actual damages need not be
proven by the party asserting a right to the liquidated damages. Id. at 892. Under
Washington’s two-part liquidated damages test, first, the “amount fixed [as liquidated
damages] must be a reasonable forecast of just compensation for the harm that is
caused by the breach.” Walter Implement, Inc. v. Focht, 107 Wn.2d 553, 559, 730 P.2d
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1340 (1987). Secondly, “the harm must be such that it is incapable or very difficult of
ascertainment.” Id. “[L]iquidated damages agreements fairly and understandingly
entered into by experienced, equal parties with a view to just compensation for the
anticipated loss should be enforced.” Wallace, 124 Wn.2d at 886. “Determination of
whether the test is met depends upon the facts and circumstances of each case.”
Walter Implement, 107 Wn.2d at 559.
Bridges West contends that the late fee charge at issue meets the two-part
liquidated damages test. First, Bridges West asserts that the 6 percent late charge was
an effort to compensate Jones for her losses in the case of a default by JDH. Moreover,
Bridges West claims that the 6 percent fee represents the collection risk that Jones
would face during a time when the real estate market was still vulnerable due to the
great recession. Bridges West also argues that the late fee would compensate Jones for
the potential loss on other investment opportunities. However, Bridges West’s argument
fails for two reasons.
First, in line with Wallace, our court must determine whether the liquidated
amount acts as a reasonable pre-estimate loss. 124 Wn.2d at 894-97. Here, Bridges
West fails to cite to any evidence to support that the parties involved had intended for
the 6 percent late charge to constitute a legitimate estimate of Jones’s/Bridges West’s
actual damages that would be incurred upon default.
Additionally, Bridges West’s argument as to how it has met the two-prong Walter
Implement test is raised for the first time on appeal, resulting in a post-hoc
rationalization to ensure enforcement of the late charge provision. “Courts will look to
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the intention of the parties to make an accurate assessment of the clause’s purpose.”
Without such evidence, the late fee provision cannot be justified as a reasonable
forecast of loss. Since Bridges West has not established that the 6 percent late fee is a
fair estimate of damages suffered, the provision appears punitive as opposed to
compensatory. As a result, under the principles of Walter Implement, we find that the
lower court did not abuse its discretion, affirming its determination that the late fee
provision is unenforceable because it is a penalty.
Attorney Fees on Appeal
Both parties request attorney fees under the attorney fee provision in the original
note.
“A party is entitled to attorney fees on appeal if a contract, statute, or recognized
ground of equity permits recovery of attorney fees at trial and the party is the
substantially prevailing party.” Hwang v. McMahill, 103 Wn. App. 945, 954, 15 P.3d 172
(2000). The original note provides that “[s]hould suit be commenced to collect this note
or any portion thereof, such sum as the Court may deem reasonable shall be added
hereto as attorney’s fees.” Though JDH did not commence suit to collect on this note,
under RCW 4.84.330, the prevailing party, whether they are the party specified in the
contract or not, shall be entitled to reasonable attorney fees in addition to costs and
necessary disbursements.
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Because we affirm as to both issues, JDH is the prevailing party, and is thereby
entitled to attorney fees on appeal. 3
We affirm.
WE CONCUR:
3 Because we affirm, we need not consider Bridges West additional claim that the trial court’s disbursement of $2.3 million to JDH should be reversed, an issue Bridges West raises for the first time in its reply brief. A court will not review an issue raised and argued for the first time in a reply brief. In re Pers. Restraint of Rhem, 188 Wn.2d 321, 327, 394 P.3d 367 (2017); RAP 10.3(c). 14