Goebel v. First Federal Savings & Loan Ass'n
266 N.W.2d 352, 83 Wis. 2d 668, 1978 Wisc. LEXIS 1014 (1978)
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Rule of Law:
When a contract is drafted by one party and includes ambiguous terms, it will be construed against the drafter. If a mortgage note explicitly provides for adjusting monthly payments for certain events but is silent on doing so for an interest rate increase, the lender may not unilaterally increase payments or extend the loan term to implement the rate hike.
Facts:
- On May 29, 1964, the Goebels executed a mortgage note with First Federal Savings & Loan Association for $17,000 at 6% interest.
- The note required fixed monthly payments of $110 and stated that the principal and interest must be paid in full within 25 years.
- The note contained an adjustable-rate clause allowing First Federal to change the interest rate after three years upon four months' written notice.
- The note explicitly stated that if additional sums were advanced to the borrowers, the 'monthly installments shall be adjusted,' but it contained no similar provision for an interest rate increase.
- In September 1973, First Federal notified the Goebels that the interest rate on their loan would be increased from 6% to 7%.
- In November 1973, First Federal informed the Goebels they could absorb the increase by either paying an additional $7.49 per month or by extending the loan's term by approximately two years.
- The Goebels did not respond to the notice and continued to make their original monthly payments of $110.
Procedural Posture:
- The Goebels (plaintiffs) filed a class action lawsuit against First Federal Savings & Loan Association (defendant) in a Wisconsin trial court.
- Both parties filed motions for summary judgment.
- The trial court granted summary judgment in favor of the Goebels, holding that the contract did not permit First Federal to increase monthly payments or extend the loan term.
- First Federal (appellant) appealed the trial court's judgment to the Supreme Court of Wisconsin.
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Issue:
Does a mortgage note that allows a lender to increase the interest rate, but also specifies a fixed monthly payment and a maximum loan term, permit the lender to unilaterally increase the monthly payment or extend the loan term to implement that rate increase?
Opinions:
Majority - Connor T. Hansen, J.
No. The mortgage note does not permit First Federal to unilaterally increase the monthly payments or extend the loan term to implement an interest rate increase. Applying the principle of expressio unius est exclusio alterius, the note's specific provision for adjusting monthly payments for future advances implies that such adjustments are not permitted for other reasons, such as an interest rate change. The court must construe the ambiguous contract against its drafter, First Federal, particularly given the disparity in bargaining power. The fixed monthly payment and the 25-year maximum term are vital provisions that benefit the borrower and cannot be unilaterally altered or waived by the lender. While the interest adjustment clause is restricted, it is not rendered meaningless, as it could still apply upon prepayment, a sale triggering the due-on-sale clause, or a downward adjustment of the interest rate followed by a later increase.
Analysis:
This case serves as a crucial lesson in contract interpretation, emphasizing the doctrine of contra proferentem (construing ambiguity against the drafter). It establishes that lenders cannot rely on implication to enforce significant changes, such as modifying payment amounts, when an adjustable-rate mortgage clause is silent on the implementation mechanism. The decision reinforces that all material terms in a contract, including fixed payments and maturation dates, are to be given full effect unless explicitly made subordinate to other clauses. For future cases involving standard form contracts, particularly in consumer finance, this precedent strengthens the position of the non-drafting party by requiring lenders to be explicitly and exhaustively clear in their loan documents if they wish to reserve rights to alter fundamental loan terms.
