2022 UT App 31
THE UTAH COURT OF APPEALS
BRETT ERROR,
Appellee,
v.
MICHAEL J. BENAROYA AND BD&P COMPANY LLC,
Appellants.
Opinion
No. 20200688-CA
Filed March 10, 2022
Fourth District Court, Provo Department
The Honorable James R. Taylor
No. 200400136
Jordan K. Cameron and David L. Arrington,
Attorneys for Appellants
Barry N. Johnson and Joshua L. Lee,
Attorneys for Appellee
JUDGE MICHELE M. CHRISTIANSEN FORSTER authored this Opinion,
in which JUDGES DAVID N. MORTENSEN and RYAN M. HARRIS
concurred.
CHRISTIANSEN FORSTER, Judge:
¶1 Michael J. Benaroya and BD&P Company LLC
(collectively, Borrowers) borrowed money from Brett Error
(Lender). When Borrowers failed to repay the loan, Lender filed
an action to collect. Thereafter, Lender filed a motion for
summary judgment, seeking repayment of the loan plus
compound interest on the outstanding balance. In response,
Borrowers agreed that Lender was owed the principal balance of
the loan and some interest. However, they argued Lender was
entitled to simple interest only. Under the terms of the loan, the
difference between the two interest calculations is nearly $4
million. The district court agreed with Lender and granted his
Error v. Benaroya
motion. We reverse and conclude that Lender is entitled to
recover only simple interest.
BACKGROUND
¶2 On June 18, 2014, Lender and Borrowers entered into a
Memorandum Loan Agreement (the Memorandum), Secured
Promissory Note (the Note), and Security Agreement
(collectively, the Loan Documents). Under the Loan Documents,
Lender provided $1 million to Borrowers. Borrowers agreed to
repay the loan principal, together with loan fees totaling $75,000
(collectively, the Repayment Amount), no later than September
26, 2014 (the Maturity Date). The Memorandum further
provided, “After the Maturity Date, the ‘Default Rate’ shall be
2.75% per month on the principal plus Loan Fee, pro rata for any
partial months.” Likewise, the Note provided that in the event
Borrowers failed to repay the entire Repayment Amount by the
Maturity Date, “interest shall begin to accrue on any outstanding
balance at a rate of 2.75% per month, pro rata for any partial
months.”
¶3 Borrowers did not pay any of the Repayment Amount by
the Maturity Date. Consequently, Lender filed suit against
Borrowers for breach of contract, seeking damages for the
Repayment Amount plus 2.75% monthly compounding interest
on any outstanding balance. Borrowers responded with a
Motion to Dismiss or Alternatively to Strike, arguing Lender’s
claims were based “on an improper interest calculation.”
Specifically, Borrowers argued the interest provisions in the
Loan Documents provided for only simple interest, rather than
compound interest, and that Lender’s interpretation “contradicts
the plain terms” of the Loan Documents. Thereafter, Lender
moved for summary judgment on the grounds there was no
dispute that Borrowers had not repaid the Repayment Amount.
In addition, Lender again asserted that per the “plain language”
20200688-CA 2 2022 UT App 31
Error v. Benaroya
of the Note, he was entitled to the Repayment Amount plus
monthly compound interest on any outstanding balance.
¶4 The district court heard argument on all pending motions.
At the close of argument, the court granted Lender’s motion,
reasoning the Note was not ambiguous and that it called for
compound interest. The court’s ruling was later reduced to a
written order, and judgment was entered against Borrowers in
the amount of $7,180,201.01. Of that, $1,075,000 was the
Repayment Amount and $6,105,201.01 was interest accruing
from the Maturity Date through July 26, 2020. In addition, the
court ordered that compound interest shall accrue on any
outstanding balance of the judgment at a rate of 2.75% per
month. Thereafter, the court issued a separate order awarding
Lender attorney fees and costs on the grounds that Lender
“prevailed on his claims against [Borrowers]” and that the Loan
Documents “specifically provided for the award of attorney’s
fees to the prevailing party in the event of litigation.”
ISSUE AND STANDARD OF REVIEW
¶5 Borrowers now appeal and argue the district court erred
in granting summary judgment in favor of Lender, asserting the
court incorrectly determined the Note calls for compound
interest.1 We review a district court’s ruling on summary
judgment for correctness. See Orvis v. Johnson, 2008 UT 2, ¶ 6,
177
P.3d 600; see also Mind & Motion Utah Invs., LLC v. Celtic Bank
Corp.,
2016 UT 6, ¶ 15,
367 P.3d 994 (“The interpretation of a
1. Alternatively, Borrowers argue the district court erred (1) by
failing to conclude the interest provision in the Note was
ambiguous and (2) by failing to consider extrinsic evidence to
resolve the ambiguity. Due to our resolution of Borrowers’ main
argument, we need not address either of these alternative
arguments.
20200688-CA 3
2022 UT App 31
Error v. Benaroya
contract is [a] legal question, which we . . . review for
correctness.”).
ANALYSIS
¶6 Borrowers and Lender both agree that Lender is entitled
to the Repayment Amount. The parties disagree, however, as to
the calculation of interest on that amount. In relevant part, the
disputed provision of the Note states, “Should [Borrowers] fail
to fully pay the Repayment Amount by the Maturity Date,
interest shall begin to accrue on any outstanding balance at a
rate of 2.75% per month . . . .” Interpreting this provision
according to its “plain and ordinary meaning,” the district court
concluded the Note “unambiguously calls for compound
interest.” Borrowers challenge that conclusion, contending it was
in error because the Note does not contain terms creating an
“express agreement” for compound interest and that in Utah,
“[w]ithout an express agreement, interest can only be simple.”
¶7 Simple interest is “[i]nterest paid on the principal only
and not on accumulated interest.” Simple interest, Black’s Law
Dictionary (11th ed. 2019). Put differently, simple interest does
not merge with the principal, and thus “[i]nterest accrues only
on the principal balance.” Id. In contrast, “compound interest
means interest on interest, in that accrued interest is added
periodically to the principal, and interest is computed upon the
new principal thus formed.” Brady v. Park,
2013 UT App 97, ¶ 16,
302 P.3d 1220 (quotation simplified).
¶8 “The issue of compound interest is well settled in Utah.”
Christensen v. Munns,
812 P.2d 69, 71 (Utah Ct. App. 1991).
“Compound interest is not favored by the law.” Brady,
2013 UT
App 97, ¶ 17 (quoting Watkins & Faber v. Whiteley,
592 P.2d 613,
616 (Utah 1979) (per curiam)); see also City of Hildale v. Cooke,
2001
UT 56, ¶ 36,
28 P.3d 697; Christensen,
812 P.2d at 71; Mountain
States Broad. Co. v. Neale,
783 P.2d 551, 555 (Utah Ct. App. 1989).
20200688-CA 4
2022 UT App 31
Error v. Benaroya
Accordingly, an award of compound interest will be upheld
“only where the parties expressly agreed to compound interest”
by the terms of the contract. Brady, 2013 UT App 97, ¶ 17
(quotation simplified). Moreover, when the terms of the contract
are ambiguous about the application of compound interest, such
ambiguity necessarily “falls short of an express agreement,” see
id. ¶ 20, and necessarily means, as a matter of law, that the
contract provides for only simple interest, see Curry v. Moody,
40
Cal. App. 4th 1547, 1553–54 (1995) (“[A]s a matter of law an
ambiguous contract cannot be construed to provide for
compound interest.”).
¶9 In Brady v. Park,
2013 UT App 97,
302 P.3d 1220, this court
addressed whether the terms of a contract expressly called for
compound interest. There, the district court ruled the contract
“unambiguously” provided for compound interest, reasoning
that the clause requiring interest on “the entire balance”
“includ[ed] principal and accrued interest.” Id. ¶¶ 3, 7 (quotation
simplified). But this court disagreed, holding that the plain
language of the contract did “not expressly call for compound
interest.” Id. ¶ 19. It explained,
[T]he [contract] does not employ the term
compound interest, a settled term of art.
Furthermore, it does not describe compound
interest. It does not refer to the payment of interest
on both the principal and the previously
accumulated interest; it does not provide that
accrued interest is added periodically to the
principal and that interest is computed upon the
new principal thus formed; and it does not indicate
that unpaid interest is itself subject to an interest
charge.
Id. (quotation simplified). The court also reasoned that
compound interest was not proper because the contract was
20200688-CA 5 2022 UT App 31
Error v. Benaroya
ambiguous. The court explained the phrase “entire balance”
could reasonably mean “both principal and unpaid accrued
interest” or simply “the entire principal balance.” Id. ¶ 20
(quotation simplified). Thus, the meaning of the phrase was left
“to inference and implication,” which caused the contract to
“fall[] short of an express agreement for compound interest.” Id.
¶10 Here, the district court’s conclusion that the Note calls for
compound interest is at odds with Brady and contrary to the
general rule that compound interest is disfavored by the law. As
in Brady, the Note does not expressly provide for compound
interest. First, the Note does not “employ the term compound
interest,” nor does it use terms that clearly describe compound
interest. See id. ¶ 19 (quotation simplified). Second, the Note is
ambiguous because the phrase “any outstanding balance” is
capable of more than one reasonable interpretation.2 See id. ¶ 20.
We need not apply the well-settled rules of contract
construction—i.e. looking to extrinsic evidence to determine the
intentions of the parties, see WebBank v. American Gen. Annuity
Service Corp., 2002 UT 88, ¶ 19, 54 P.3d 1139—to the Note,
because an agreement that does not unambiguously provide for
compound interest can provide only for simple interest, see
Brady,
2013 UT App 97, ¶ 20.
¶11 In sum, we agree with Borrowers that the Note
contemplates simple interest only.3
2. Indeed, during oral argument Lender’s counsel conceded the
phrase could be reasonably interpreted in more than one way.
3. Because we reverse the court’s grant of summary judgment,
we also vacate the court’s fee award to Lender as the “prevailing
party.” We remand for the court to redetermine which party is
(continued…)
20200688-CA 6 2022 UT App 31
Error v. Benaroya
CONCLUSION
¶12 Because the Note did not expressly provide for
compound interest, Lender is entitled to recover only simple
interest on the Repayment Amount. We therefore reverse the
district court’s grant of summary judgment in favor of Lender
and vacate the district court’s $7 million judgment in Lender’s
favor. We also vacate the district court’s award of attorney fees
to Lender as the prevailing party. We remand with instructions
for the district court to enter judgment in Lender’s favor in an
amount reflecting recovery of only simple interest and for the
court to reassess its fee award in light of our opinion.
(…continued)
the prevailing party and to allocate an award of attorney fees
consistent with that determination.
20200688-CA 7 2022 UT App 31
