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Washington v. Wallace

September 9, 1996


Appeal from Superior Court King County. Docket No: 94-2-26328-5. Date filed: 01/09/95. Judge signing: Hon. Nancy A. Holman.

Authored by William W. Baker. Concurring: Faye C. Kennedy, H. Joseph Coleman.

The opinion of the court was delivered by: Baker

BAKER, C.J. - William Wallace, Jr., appeals the trial court's grant of summary judgment dismissing his claim for default interest due on a promissory note and awarding attorney fees to Intercommunity-Mercy Washington II, Limited Partnership (Mercy), maker of the note. He argues that the note's default interest provision does not fail for lack of the phrase "time is of the essence", that Mercy defaulted by not tendering payment on Saturday October 1, and the interest rate provided by the acceleration clause is not unenforceable as a penalty. We agree that the phrase "time is of the essence" was not required. However, we also hold that the retroactive aspect of the default interest rate provision is an unenforceable penalty, and payment was not due on Saturday, October 1 if that was not a full business day for both parties. Accordingly, we reverse and remand to the trial court to make the necessary factual findings and, if applicable, assess post-default interest.


On December 8, 1992, as part of a real estate investment transaction, Mercy executed a contingent *fn1 promissory note in favor of Wallace for $140,000, bearing interest at the rate of eight percent, compounded quarterly. The note provided for quarterly payments of $8,651.95 to begin on the earlier of "the first day of the second quarter following closing and funding of the permanent financing" or April 1, 1995. The note also contained a default provision:

If Maker defaults in the payment of any amount due under this promissory note, the entire principal sum and accrued interest shall at once become due and payable at the option of the Holder of this promissory note. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any time Maker is in default. Upon default, the total unpaid principal balance due shall accrue interest at the rate of eighteen percent (18%) per annum compounded daily accumulated from and after December 8, 1992, until paid in full.

Mercy's permanent financing closed and funded in May 1994, making the first quarterly installment due the first day of October 1994. Wallace delivered by facsimile a notice of default and intent to accelerate on Monday October 3, 1994, after failing to receive payment on Saturday October 1. Mercy tendered payment of the first installment on October 3. Wallace rejected the payment and reaffirmed his intention to accelerate the debt. Mercy tendered payment of the accelerated debt on October 13, but did not pay the default interest, and brought an action for declaratory relief from liability for the default interest. Wallace brought an action against Mercy and other entities for payment, and the two actions were consolidated.

Both parties brought motions for summary judgment. The trial court denied Wallace's motion for summary judgment and awarded summary judgment in favor of Mercy, declaring its obligations under the note satisfied and dismissing Wallace's claims against it. The court also awarded Mercy reasonable attorney fees and costs.


Mercy argues that it did not default by tendering payment on October 3 because the note did not provide that time was of the essence. Although promissory notes typically include the phrase "time is of the essence" in their default or acceleration clauses, *fn2 that language is not required in this context.

The phrase is usually required in real estate sale and lease contracts in order to excuse one party's performance, thus rescinding the contract, due to the other party's default. *fn3 'The theory upon which the courts hold that in such cases time is of the essence, is that damage resulting to the seller by reason of delay in performance on the part of the purchaser cannot be estimated nor compensated. . . . 'It is a matter of common understanding that when these words--"time is of the essence of this contract"--are used their purpose is to protect the vendor against delays in payment of the purchase price, and the tying up of his estate beyond the fixed period, without the payment of the agreed compensation therefor .' *fn4 "The agreement becomes legally defunct upon the stated termination date if performance is not tendered." *fn5 Black's Law Dictionary states that "time is the essence of contract" "means that performance by one party at [a] time or within [a] period specified in [the] contract is essential to enable him to require performance by [the] other party." *fn6 Rescission is not the desired remedy in this case. There were no reciprocal obligations; the holder owed no performance. Evidence that the parties meant there to be consequences for a default is provided by the default provisions in the note. If Mercy did not perform by the date specified, it defaulted.

Mercy argues that the court should substitute a reasonable time for the due date in the absence of time is of the essence language. The case Mercy cites as authority does not support this argument. There, the court held that a reasonable time will be imposed if no due date is specified. *fn7 Here the due date was "the first day of the . . . quarter".


Thus, whether Mercy defaulted depends on the meaning of "the first day of the quarter". Wallace argues that "first day" means the first calendar day, regardless ...

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