On February 8, 2011, the United States District Court for the Eastern District of Missouri rejected a plaintiff’s claim that the calculation of interest on the basis of a 360-day year breached the parties’ contract under Illinois law, in Kreisler & Kreisler, LLC v. National City Bank et al., No. 4:10-cv-00956.
In the first case interpreting RBS Citizens, N.A. v. RTG-Oak Lawn, LLC, No. 10-1729 (Ill. App. Ct. Feb. 11, 2011) (RBS), the court held that an interest calculation provision alleged to be less clear than that in RBS was sufficient to disclose to the plaintiff how interest would be calculated. This decision provides further ammunition for banks facing claims or defenses challenging the 365/360 interest-calculation method.
Plaintiff Kreisler & Kreisler, LLC (Kreisler) filed suit against National City Bank and PNC Bank Corp. (collectively, PNC), alleging that PNC breached the terms of a promissory note that Kreisler executed in favor of PNC by using the 365/360 method to calculate interest owed on the note. The 365/360 method takes the stated annual interest rate in the note, divides it over a year of 360 days, and then multiplies the result by 365 to determine the total interest owed over the course of a year. The method generates equal daily and monthly interest charges that are not possible using a 365-day year, but also has the effect of increasing the effective interest rate for the 365-day year by 1/72.
Kreisler alleged that the interest rate calculation provision in the note was “incomprehensible,” because it stated that the “annual interest rate for the note” would be calculated by “applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.” In other words, Kreisler alleged that the formula in the note was meant to calculate the annual interest rate, and not the amount of annual interest, and also alleged that the formula did not balance because it uses the annual interest rate to derive the annual interest rate – a mathematical impossibility.
The district court rejected these claims, citing RBS and Judge Amy St. Eve’s opinion in Bank of America v. Shelbourne Dev. Group, Inc., 732 F. Supp. 2d 809 (N.D. Ill. 2010), as controlling law. In both cases, the courts found that the note provisions governing interest calculation unambiguously set forth that the 365/360 method would be used, and therefore the bank could not have breached any agreement by using that method. Similarly, the district court in Kreisler found that the interest calculation provision in the note “was unambiguous, adequately disclosed the use of the 365/360 method, and lawfully used that method in conjunction with a state[d] per annum interest rate.” The court also rejected Kreisler’s claim that the language was “unintelligible,” noting that the loan at issue was a commercial loan between sophisticated parties, and that the 365/360 method is commonly used.
This case is significant because Kreisler did not rely on the Illinois Interest Act or the Illinois Promissory Note and Bank Holiday Act, as have other parties who have asserted claims or defenses based on the 365/360 method of interest calculation. Instead, Kreisler relied on a breach of contract theory and attempted to distinguish the language in the note at issue from those at issue in other cases in which similar claims were dismissed. The RBS decision and the 2010 amendment to the Interest Act have effectively made Interest Act claims unfeasible. The court’s unwillingness to allow Kreisler’s breach of contract theory will make it still more difficult for litigants to assert claims and defenses based on the 365/360 method.
Kreisler has filed a notice of appeal, and its opening brief is due in May 2011.