Monday, August 1, 2011

FYI: Ill App Ct Rejects State-Law Usury Allegations re: "365/360" Interest Calculation

The Illinois Appellate Court for the First District recently held that
calculating interest on a 365/360 basis in accordance with the terms of
the note does not violate the Illinois Interest Act.

A copy of the opinion is available at

Defendant-Appellee First Choice Bank ("the Bank") extended a loan to
plaintiff-appellant Asset Exchange II, LLC ("Asset Exchange"). The terms
of the Note provided for an initial interest rate of 8.25%, and for the
interest rate to be computed on a 365/360 basis. The Note also provided
that the borrower had read and understood all of its provisions, making
special mention of the variable interest provisions.

Asset Exchange sued the Bank, alleging that because of purported
ambiguities in the Note, calculating interest based on a 360 day year
violated the Illinois Interest Act and constituted a breach of contract
and common law fraud, among several other causes of action. The trial
court dismissed the complaint, and Asset Exchange appealed.

As you may recall, the Illinois Interest Act does not apply to loans to
corporations. Further, the Act was recently amended to provide that "a
rate or amount of interest may be lawfully computed when applying the
ratio of the annual interest rate over a year based on 360 days." 815
ILCS 205/4(5).

Because "[t]here is no dispute here that [Asset Exchange] is a corporation
within the meaning of the Illinois Interest Act," the Court had little
difficulty in holding that the Act did not apply to the loan Asset
Exchange received from the Bank. Consequently, it held that the related
counts of Asset Exchange's complaint were properly dismissed.

Further, the Court examined whether the terms of the Note would have
violated that Illinois Interest Act, if the Act were to apply. Asset
Exchange's argument rested on a provision of the Act which states that if
a contract does not provide for a time period to calculate interest, "per
annum" or "by the year" is read into the contract. "Year" is defined as
365 days. Because the interest rate in the Note was not immediately
followed by a time period for the calculation of that interest, Asset
Exchange claimed that the interest must be calculated over a period of 365

The appellate court rejected this argument, on the grounds that the Note
did provide a time period for the calculation of interest. Therefore, the
Court stated that "per annum" or "by the year" must be inserted into a
contract only "if no period of time is stated in the instrument," and
observed that it and other courts applying Illinois law had found that the
365/360 method of calculating interest was not unlawful or ambiguous.

The Court next considered Asset Exchange's breach of contract and common
law fraud claims. It found that the terms of the Note were unambiguous,
and that nothing appeared in the record indicating that those terms had
been concealed from Asset Exchange. Because "it is axiomatic that a party
cannot breach a contract by complying with its terms," the Court held that
the trial court properly dismissed the breach of contract claim.

The Court used the same reasoning, in addition to the fact that the Note
was signed by "two sophisticated businessmen" who had ample opportunity to
review its terms, to hold that the trial court properly dismissed Asset
Exchange's common law fraud claim.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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