## Facts

- Borrowers obtained nine real-estate–secured loans with promissory notes setting interest at prime plus 1% and containing a “premium” default-interest clause increasing the rate by 5% after default, “at the option of the holder ... without notice or demand.”
- Deeds of trust securing the loans addressed acceleration through California notice-of-default procedures, indicating acceleration could occur upon service or recordation of a notice of default.
- In early 1995, the borrowers stopped making payments while the FDIC controlled the loans.
- The FDIC sent demand/foreclosure-threat letters that included payoff calculations using the contract rate; the letters stated the default interest clause was invoked and that the lender “may elect” to impose the higher rate or file notices of default.
- The FDIC did not record notices of default.
- The FDIC later assigned the loans to Beal Bank.
- In early 1997, Beal recorded notices of default for seven loans; by then, three loans had already matured by their original terms (principal fully due).
- The borrowers transferred the collateral property to Crystal Properties, a limited partnership, which filed for bankruptcy the next day.
- In bankruptcy, Beal claimed default interest accrued from the 1995 payment default (including on the matured loans); Crystal argued default interest began only when Beal recorded notices of default in 1997 and could not apply to already matured loans.

## Issues

1. Under California law and the integrated loan documents, when does a default interest rate stated to apply “at the option of the holder” begin to accrue: upon payment default or only after the holder affirmatively exercises the option to accelerate?
2. Whether a default-interest clause tied to acceleration applies to loans that matured by their own terms before any election to accelerate or impose default interest.

## Decision

- The Ninth Circuit affirmed summary judgment for Crystal.
- Default interest did not begin upon the 1995 payment default; it began only when the holder first took affirmative action to exercise its option to accelerate, which occurred when Beal recorded notices of default in 1997.
- The FDIC’s letters did not constitute a clear election to impose default interest because they were conditional and used payoff figures calculated at the contract rate.
- The default interest clause did not apply to the three loans that had already matured before the notices of default, because the clause was linked to acceleration and there was nothing left to accelerate after maturity.

## Legal Principles

- Under California law, instruments executed as part of the same transaction (e.g., notes and deeds of trust) are construed together to give effect to all provisions.
- A default-interest provision conditioned on the lender’s “option” is not self-executing; the lender must take an affirmative, unequivocal act (commonly notice consistent with the security instrument and state law) to exercise the option before the premium rate accrues.
- Conditional communications and payoff calculations using the non-default contract rate may show no election to impose default interest.
- When a default-interest clause is expressly tied to acceleration, it does not apply to obligations that have already matured, because maturity leaves no acceleration event to trigger the clause.

## Conclusion

The court held that, for these California real-estate loans, default interest “at the holder’s option” accrued only after a clear affirmative election consistent with the integrated note and deed-of-trust scheme, and it could not be imposed on loans that had already matured before any such election occurred.


Beal Bank v. Crystal Props., Ltd., L.P. (In re Crystal Props., Ltd., L.P.), 268 F.3d 743 (9th Cir. 2001)