FYI: 3rd Cir Rules FDCPA Claim Arose When Borrower Signed Loan Mod and Foreclosure Firm Did Not Dismiss Complaint

The U.S. Court of Appeals for the Third Circuit recently held that a borrower's purported claim under the federal Fair Debt Collection Practices Act was not timely filed, where the foreclosure firm's representations of the character, amount or legal status of the debt in its foreclosure complaint became objectively false when the borrower signed a loan modification, more than one year prior to the filing of her FDCPA action.

 

The Court also ruled that:  (1) the original complaint failed to give the law firm fair notice of the FDCPA claim against it and there was no relation back to the date of the original pleading under Federal Rule 15(c);  (2) the law firm's filing of a foreclosure complaint against the borrower was "in connection with . . . the prosecution of a lawsuit to reduce a debt to judgment," and thus excluded the law firm from the definition of "debt collector" under Pennsylvania's Fair Credit Extension Uniformity Act.

 

A copy of the opinion is available at:  http://www.ca3.uscourts.gov/opinarch/113382p.pdf.

 

Plaintiff borrower obtained a mortgage loan from a bank ("Lender") and later became unable to make the payments.  Lender's law firm ("Law Firm") contacted Borrower about the missed payments and eventually filed a foreclosure complaint against Borrower, but Lender took no further action on the foreclosure complaint.   Lender subsequently assigned Borrower's loan to a loan servicer ("Servicer"), which entered into a loan modification agreement with Borrower.  Borrower made the payments under the loan modification plan, but Law Firm did not withdraw the foreclosure complaint until over a year after the date of the loan modification agreement. 

 

Because of the delay in dismissing the foreclosure complaint, Borrower filed a putative class-action complaint in Pennsylvania state court against Lender, Servicer and the Law Firm, alleging violations of Pennsylvania's Fair Credit Extension Uniformity Act, 73 Pa. Cons. Stat. Ann §  2270.1 et seq. ("FCEUA"),  which in turn were based on broadly alleged violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq.   Defendants removed the case to federal District Court and filed motions to dismiss.

 

Several months later, the Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver for Lender, filed motions to stay the proceedings in order for Borrower's claims against Lender to go through the FDIC's administrative claims review process.    The FDIC denied Borrower's claim against Lender over a year after the filing of the original complaint. 

 

Following the FDIC's denial of her claim, Borrower filed a first amended complaint, adding a count against the Law Firm for supposed FDCPA violations arising out of its alleged failure to dismiss the foreclosure complaint after Borrower entered into the loan modification agreement.   Law Firm successfully moved to dismiss for failure to state a claim. 

 

Borrower then filed a second amended complaint, restyling the FDCPA claim against Law Firm to specifically allege that in failing to withdraw the foreclosure complaint, Law Firm violated the FDCPA by misrepresenting that Borrower's mortgage debt remained unpaid.   

 

Law Firm moved to dismiss the second amended complaint.  The District Court granted the motion as to the FDCPA claim, ruling that the amended complaint was not filed within the FDCPA's one-year statute of limitations and did not relate back to the timely filed original complaint under Federal Rule of Civil Procedure 15(c)(1)(B).  The District Court also dismissed Borrower's FCEUA claims against Law Firm, ruling that Law Firm's conduct associated with filing the foreclosure complaint excluded it from the FCEUA's definition of "debt collector."

 

Borrower appealed.  The Third Circuit affirmed.

 

As you may recall, Federal Rule of Civil Procedure 15(c)(1)(B) provides that an amendment to a pleading relates back to the date of the original pleading where "the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out – or attempted to be set out – in the original pleading."  Fed. R. Civ. Pro. 15(c)(1)(B).

 

In addition, the FDCPA, which defines a "debt collector" as "any person who .  . who regularly collects or attempts to collect . . . debts owed . . .  to another," prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt," including falsely representing "the character, amount, or legal status of any debt."  15 U.S.C §§ 1692a(6), 1692e.  The FDCPA also provides a one-year statute of limitations for filing claims.  15 U.S.C. § 1692k(d). 

 

Moreover, Pennsylvania's Fair Credit Extension Uniformity Act prohibits "unfair methods of competition and unfair or deceptive acts or practices with regard to the collection of debts," including any violation of the FDCPA by a "debt collector."  73 Pa. Cons. Stat. Ann. § 2270.1 et. seq.  Providing a two-year statute of limitations, the FCEUA defines "debt collector" as "[a] person not a creditor . . . engaging or aiding . . . in collecting a debt,"  including  "[a]n attorney, whenever such attorney attempts to collect a debt . . . except in connection with the filing or service of pleadings or discovery or the prosecution of a lawsuit to reduce a debt to judgment."    73 Pa. Cons. Stat. Ann. § 2270.3, 2270.5(b).

 

The Third Circuit began its analysis by examining whether Borrower's amended FDCPA claim against Law Firm related back to the original complaint under Rule 15(c)(1)(B).  In so doing, the Court noted some factual overlap between the original complaint and the second amended complaint, but concluded that the allegations in the original complaint were nevertheless factually and legally distinct from the allegations in the amended complaint. 

 

Specifically, the Third Circuit pointed out that the original complaint accused Law Firm "only of making a debt-collection phone call and of filing a Foreclosure Complaint demanding payment of purportedly unlawful attorney's fees" and that, on the other hand, the second amended complaint alleged that Law Firm "fail[ed] to withdraw the Foreclosure Complaint against [Borrower]" after [Borrower] signed the loan modification agreement, which foreclosure complaint "constituted a 'continuing representation'" that Borrower was still in arrears on the mortgage debt.   

 

Observing among other things that Borrower's "amended FDCPA claim differed in 'time and type' from the claims" alleged against Law Firm in the original pleading, the Court ruled that the original complaint did not give Law Firm fair notice of the amended claim to qualify for relation back under Rule 15(c).  See Bensel v. Allied Pilots Ass'n, 387 F.3d 298, 310 (3d Cir. 2004)(noting that Rule 15(c)(1)(B) requires "a common core of operative facts in the two pleadings), Baldwin Cty. Welcome Ctr. v. Brown, 466 U.S. 147, 149 n.3 (1984)(Rule 15(c) is premised on providing notice that comports with notice requirements of statutes of limitations for particular occurrence); Meijer, Inc. v. Biovail Corp., 533 F.3d 857, 866 (D.C. Cir. 2008)(test for Rule 15(c) analysis "is whether the original complaint adequately notified the defendants of the basis for liability the plaintiffs would later advance in the amended complaint").  

 

As the Court explained, "the facts alleged in [the first complaint]  . . .  even under the most generous reading, gave no suggestion that the [Law Firm] Defendants were culpable in any way for the conduct attributed to [Lender] or [Servicer]."   

 

Next, addressing the FDCPA's one-year statute of limitations, the Third Circuit rejected Borrower's arguments that Law Firm's alleged FDCPA violations occurred only after Law Firm learned of the modification agreement and that the statute of limitations was tolled during the time her claim against Lender was under review by the FDIC.   The Court noted in part that because the FDCPA is a "strict liability" statute, liability for the representation in the foreclosure complaint did not hinge on Law Firm's knowledge that it was false as of the date the loan modification agreement was signed. 

 

The Court thus ruled that the FDCPA claim against Law Firm accrued on the date Borrower signed the loan modification agreement when the representation about Borrower's debt became "objectively false"  -- over a year prior to the filing of the amended FDCPA claim. 

 

Finally, analyzing the requirements of Pennsylvania's FCEUA, the Court noted that Law Firm did not fall within its definition of "debt collector," which, unlike the federal FDCPA, excludes parties whose activities are "in connection with . . . the prosecution of a lawsuit to reduce a judgment to debt." Accordingly, while observing that Borrower's FCEUA claim would have been timely under the FCEUA's two-year statute of limitations, the Court ruled that Borrower failed to state a claim under the FCEUA, because Law Firm was not a "debt collector" under the FCEUA definition.

 

The Third Circuit thus affirmed the District Court's dismissal of Borrower's FDCPA and FCEUA claims against Law Firm. 

 

Ralph T. Wutscher
McGinnis 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
Email: RWutscher@mtwllp.com
 

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FYI: Ill App Ct Rules No Fraudulent Transfer, When Borrower's Interest Was Forfeited to USA and Remainder Belonged to Recipient

In a bank's fraudulent transfer action, the Illinois Appellate Court, First District, recently held that a transfer of assets from an insolvent borrower to his spouse was proper with respect to those assets where the borrower had forfeited his share of certain of the assets to the U.S. government, but fraudulent with respect to those assets in which he retained his interest. 

 

A copy of the opinion is available at http://www.state.il.us/court/Opinions/AppellateCourt/2012/1stDistrict/1113813.pdf.  

 

A bank obtained a judgment against a borrower in excess of $3,000,000, in connection with the borrower's default on a note.  The bank then filed a complaint against the borrower and his spouse, alleging that the borrower transferred various valuable assets to his spouse to prevent full collection of the judgment, in violation of Illinois' Uniform Fraudulent Transfer Act. 

 

The borrower's spouse filed a motion to dismiss, wherein she argued among other things that because the borrower had forfeited his interest in the disputed property to the United States government, the transfer could not be fraudulent.  She further argued that the transfer was necessary to allow her to pay for household expenses, including maintaining certain properties pending their sale, as required by the couple's agreement with the government. 

 

The spouse's forfeiture argument was based on a plea agreement that the borrower entered in other litigation with the United States.  In that agreement, the borrower acknowledged and agreed that the government would file a civil complaint against two properties then owned by the borrower; that the borrower relinquished his ownership of those properties; and that therefore he could not effectuate the transfer of either property.  The agreement further indicates that the government would not seek to satisfy its judgment against the spouse's interest in the marital estate, and that the spouse agreed to maintain the properties while they were on the market. 

 

The lower court denied the spouse's motion to dismiss.  The spouse then answered the complaint, admitting that she received the assets and adding several affirmative defenses, including that she needed the assets to pay for household expenses as many of the former couple's marital assets were frozen pursuant to divorce proceedings. 

 

Both parties moved for summary judgment. The lower court found for the spouse as to the two properties described above, and for the bank as to most of the remaining assets.  The spouse appealed. 

 

As you may recall, the Uniform Fraudulent Transfer Act (the "Act") deems transfers fraudulent where, among other factors, an insolvent debtor does not receive a "reasonably equivalent value" in exchange for a transfer that takes places after the debtor incurs an obligation to a creditor.  740 ILCS 160/6(a). 

 

On appeal, the spouse did not challenge that the borrower was insolvent, or that his debt to the bank was incurred prior to the transfers.  Instead, she raised several arguments to the effect that the transfers were not fraudulent.  The Court considered each in turn. 

 

First, the spouse argued that the borrower had no assets to transfer in the first place, because he had forfeited all of his assets to the government.  The Court disagreed, finding that the plain language found in documents reflecting the agreement between the government and the borrower "unequivocally limit the reach of the forfeiture judgment to the two real properties." 

 

The spouse attempting to avoid this conclusion by noting that the agreement with the United States placed a value on all of the borrower's assets, and included an agreement from the government to not collect against the spouse's portion of those assets.  Therefore, she argued, the United States seized all of the borrower's estate. 

 

The Court again disagreed, noting that the estate was valued to shield the spouse from the borrower's forfeiture, and did not change the scope of the same. 

 

Next, the spouse argued that the transfers were necessary to allow her to maintain the real property pursuant to the agreement with the United States.  The Court found that argument unconvincing, noting that the spouse had access to over $1,000,000 at the time of the disputed transfer. 

 

Accordingly, the judgment of the lower court was affirmed. 

 

Ralph T. Wutscher
McGinnis 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
Email: RWutscher@mtwllp.com
 

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FYI: 7th Cir Holds Assignment of Legal Claims Void Under Illinois Law, Assignee Plaintiff Had No Claims Under FCRA or FDCPA

The U.S. Court of Appeals for the Seventh Circuit recently held that an assignment of legal claims was void as against Illinois public policy, because the assignment was a vehicle for the assignee plaintiff's unauthorized practice of law. 

 

The Court also ruled that:  (1) the federal Fair Credit Reporting Act preempted plaintiff's state-law claim that a collection agency negligently failed to report to credit reporting agencies that it no longer owned a debt, and (2) plaintiff failed to state a claim under the federal Fair Debt Collection Practices Act, because he never alleged that the collection agency attempted to collect a debt that it longer owned.          

 

A copy of the opinion is attached.

 

Defendant debt collection agency ("Collection Agency") obtained a debt account from a telecommunications company for purposes of collecting on an unpaid debt owed by a customer ("Debtor") of the company.  Collection Agency reported the debt to various credit reporting agencies.   Later, however, the telecommunications company recalled the debt from Collection Agency, but Collection Agency allegedly did not report this event to the credit bureaus.   

 

Plaintiff Michael Todd ("Todd") entered into an agreement with Debtor whereby Debtor's rights, title, and interest in her legal claims against Collection Agency were assigned to Todd.  The agreement referred to Debtor as Todd's "client" and provided that Todd paid for the assigned claims. 

 

As the purported assignee of Debtor's legal claims, Todd filed a lawsuit against Collection Agency under the federal Fair Debt Collection Practices Act ("FDCPA") and under Illinois law.  In his complaint, Todd alleged that Collection Agency had negligently failed to report to the credit bureaus that it no longer owned the debt owed by Debtor, and that Collection Agency had supposedly violated the FDCPA by using "false, deceptive, or misleading" means in connection with the collection of the debt.  Todd did not assert a claim directly under the federal Fair Credit Reporting Act ("FCRA"). 

 

Collection Agency moved to dismiss on the grounds that Debtor's assignment of the claims to Todd violated Illinois public policy and was void, because Todd was using the assignment to engage in the unauthorized practice of law.  Collection Agency also argued that Todd had failed to allege a violation of the FDCPA and that the FCRA preempted the state-law negligence claim.  In response, Plaintiff argued that he was not engaged in the unauthorized practice of law, because he was representing only himself and was pursuing claims that he owned. 

 

Noting that Todd had a history of filing lawsuits based on assigned legal claims, the district court dismissed the complaint without leave to amend, ruling that the assignment of the claims to Todd violated Illinois public policy, because Todd had purchased the claims for the purpose of litigating and to practice law without a license.  The district court also ruled that Todd's negligence claim was preempted by the FCRA, and that Todd failed to state a claim under the FDCPA.  Todd appealed.  The Seventh Circuit affirmed.

 

As you may recall, the FDCPA prohibits "debt collectors" from using "any false, deceptive or misleading representation or means in connection with the collection of any debt" and provides that debt collectors will be liable for damages caused by their violations of the FDCPA.  15 U.S.C. §§ 1692a(6), 1692e, 1692k.

 

In addition, the Seventh Circuit noted that FCRA expressly preempts state-law claims based on alleged violations of FCRA, and creates no private right of action for violations of the duty to report accurate information to consumer reporting agencies.  15 U.S.C. §§ 1681t(b)1)(F)(state law preemption), 1681s-2(a)(duty of furnishers of information to provide accurate information), 1681s-2(d)(limitation on enforcement).

 

Rejecting Todd's various assertions, including the arguments that he was actually serving the public interest by protecting consumers from the illegal practices of debt collectors and that the claims were his own to pursue, the Seventh Circuit observed that Illinois public policy prohibits the assignment of legal claims to non-attorneys in order to litigate without a license. See, e.g., King v. First Capital Fin. Servs. Corp., 828 N.E.2d 1155, 1166 (Ill. 2005); Chicago Bar Ass'n v. Quinlan and Tyson, Inc., 214 N.E.2d 771, 775 (Ill. 1966)(protection of public requires that only licensed attorneys provided legal advice for consideration); Lazy 'L' Family Pres. Trust v. First State Bank of Princeton, 521 N.E.2d 198, 200-01 (Ill. App. Ct. 1988)(pursuing assigned claims pro se was engaging in authorized practice of law).  Accordingly, the Circuit Court agreed with the district court that the assignment of Debtor's claims to Todd was void, and ruled that the lower court properly dismissed Todd's complaint without leave to amend.

 

The Seventh Circuit also ruled that, even if the assignment were not void, FCRA preempted the state-law negligence claim and that there was no private right of action based on Collection Agency's alleged failure to notify the credit bureaus that it no longer owned the debt.    

 

Finally, noting that Todd never made the critical allegation that Collection Agency attempted to collect on a debt it no longer owned, the Court further ruled that Todd failed to state a claim under the FDCPA that Collection Agency made a "false, deceptive, or misleading representation" in connection with the collection of a debt.   

 

Ralph T. Wutscher
McGinnis 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
Email: RWutscher@mtwllp.com
 

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FYI: 2nd Cir Rules Dunning Letter Stating Student Loans "Not Eligible for Bankruptcy Discharge" Violated FDCPA

The U.S. Court of Appeals for the Second Circuit recently held that a debt collection letter, which stated that a debtor's student loans were "not eligible for bankruptcy discharge" following the debtor's bankruptcy in which she listed the student loans as non-dischargeable, still violated the FDCPA's prohibition against "false, deceptive, or misleading" debt collection practices, as the debtor could reasonably interpret the letter to mean that discharge of her student loan debt was completely unavailable to her even though it was still possible for the debtor to re-open her bankruptcy case and pursue a discharge for "undue hardship."  

 

A copy of the opinion is available by clicking here.

 

Plaintiff-debtor ("Debtor") filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code.  In her bankruptcy petition, Debtor listed her student loan debt as "not dischargeable" and did not seek to discharge her student loans during the course of her bankruptcy proceeding.  Accordingly, Debtor's student loan debt was not discharged and remained due and owing. 

 

A number of years following Debtor's bankruptcy proceeding, Defendant debt collector ("Debt Collector"), in the business of collecting overdue student loans on behalf of the U.S. Department of Education, mailed a letter to Debtor stating in part that Debtor's account "is NOT eligible for bankruptcy discharge and must be resolved." 

 

Debtor subsequently commenced a class action law suit on behalf of herself and almost 200 other people who had received letters containing the same language.  Debtor claimed that the statement in the collection letter that the student loan debt was "ineligible" for bankruptcy discharge was a "false, misleading, or deceptive" debt collection practice in violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. ("FDCPA"). 

 

The district court granted Debt Collector's motion for summary judgment and dismissed Debtor's complaint.  The district court concluded that Debt Collector's letter was "not inaccurate," because Debtor had not taken any of the steps necessary for the bankruptcy court to address a potential discharge of her student debt, including bringing an adversary proceeding and making a showing that payment of the debt would cause Debtor an "undue hardship." The lower court stated, "until she can make [such] a showing, . . . the debt is, in fact, not dischargeable in bankruptcy." Debtor appealed.

 

The Second Circuit reversed and remanded, ruling that as long as Debtor could potentially re-open the bankruptcy case and satisfy the "undue hardship" test, Debt Collector's letter was false on its face and thus violated the FDCPA.

 

As you may recall, the FDCPA provides that a "debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt."  15 U.S.C. § 1692e.  In addition, the Bankruptcy Code provides that debt consisting of government-backed student loans is not dischargeable unless repayment of the debt "would impose an undue hardship on the debtor."  11 U.S.C. § 523(a)(8). 

 

Noting among other things that Debtor would have to re-open her bankruptcy case to file an adversary proceeding, and then would bear the burden of demonstrating that repayment of her student loans posed an "undue hardship" to her, the Second Circuit reasoned that, while such obstacles to discharge made student loan discharge more difficult, they did not render the student loan debt completely "ineligible" for bankruptcy discharge, as stated in the collection letter.   See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395, 396 (2d Cir. 1987)(setting forth the test for showing  "undue hardship"); 11 U.S.C. § 350(b)(allowing a bankruptcy case to be reopened "to accord relief to the debtor").   The Court thus concluded that Debt Collector's letter mischaracterized the dischargeability of the student loan debt.

 

Further, in applying the "least sophisticated consumer" standard used to determine whether a collection letter is "false, misleading or deceptive" under the FDCPA, the Second Circuit ruled that Debt Collector's inaccurate representation of the dischargeability of the debt could lead Debtor to reasonably, but incorrectly, conclude that a bankruptcy discharge of her student loan debt was completely unavailable to her. 

 

The Court agreed with Debtor that, because she could still pursue a discharge of her student loan debt by taking certain steps to re-open the case and prove undue hardship, it was error for the district court to conclude that Debt Collector's letter did not violate the FDCPA. 

 

In so ruling, the Second Circuit noted that the district court had failed to apply the objective "least sophisticated consumer" test, and placed too much weight on the circumstances surrounding Debtor herself.   Accordingly, the Court concluded that Debt Collector's letter was "false" and "fundamentally misleading" and that the letter's "capacity to discourage debtors from fully availing themselves of their legal rights renders its misrepresentation exactly  the kind of 'abusive debt collection practice' that the FDCPA was designed to target." 

 

The Court remanded for further proceedings.

Ralph T. Wutscher
McGinnis 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
Email: RWutscher@mtwllp.com
 

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FYI: Cal App Ct Rules Default Interest Rate Could Not Be Charged After Note Matured

The California Court of Appeals, Second Appellate District, recently considered whether an acceleration clause in a note -- which was coupled with a provision for a high default rate of interest to apply after acceleration -- could be triggered after the note matured or otherwise became fully due and payable.  The Court answered in the negative, concluding that after the note matured and was fully due and payable, there was nothing to accelerate. 

 

A copy of the opinion is available at http://www.courts.ca.gov/opinions/documents/B231920.PDF.
 
The plaintiff, a non-profit corporation (the "corporation") entered into negotiations to sell a community center to the Defendant, Hyman Levy ("Levy").  Levy deposited $2.7 million into an escrow account to demonstrate his interest in the property. When it became clear that the negotiations would take some time, that $2.7 million was converted to a loan to the corporation, secured by a deed of trust on the subject property. 

 

The salient terms of the agreement between the corporation and Levy were as follows: (1) the corporation agreed to pay Levy the full amount of the principal, plus all applicable interest, by September 30, 2006; (2) Levy had the right to declare the full amount immediately due and payable upon the corporation's failure to make a required payment; and (3) if Levy chose to declare the full amount of the loan due and payable, interest would accrue thereafter at the highest rate permitted under applicable state law. 

 

When the promissory note matured, the parties continued to negotiate the terms of a potential sale.  The corporation did not pay off the note, and Levy did not demand repayment.  After those negotiations broke down, Levy demanded repayment of the note.  The corporation located another buyer, and informed Levy that it expected to pay off the loan shortly.  Levy filed a Notice of Default, wherein he stated that the outstanding debt was more than $3 million.  Levy's payoff demand was calculated on the basis that the corporation owed interest under the highest legal rate permitted, beginning on the day after the loan matured. 

 

The corporation disagreed, but paid the requested amount under protest.  It then sued Levy, asserting causes of action for breach of contract and money had a received.  The corporation argued, among other things, that Levy could not charge interest at the maximum applicable rate because he did not declare the entire obligation immediately due and payable. 

 

Prior to the trial, Levy filed a motion in limine, attempting to exclude the introduction of documents other than the note, and testimony regarding the conduct of the parties.  He argued that the terms of the note were unambiguous, and should control the outcome of the litigation.  The corporation agreed that the note was unambiguous, but nevertheless argued that it be allowed to introduce extrinsic evidence to support its interpretation of the note -- specifically, draft purchase agreements which provided that the corporation owed less than was subsequently claimed by Levy, and at a lower interest rate. 

 

The lower court ruled in Levy's favor as to the motion in limine, finding that extrinsic evidence was improper where both parties agreed that the terms of the note were unambiguous; and further ruled that the default interest rate -- e.g., the highest permissible interest permitted under law -- was automatically triggered when the loan matured.  The corporation appealed. 

 

The Court began by affirming the lower court's decision to grant Levy's motion in limine, finding that it was appropriate given that both parties agreed that the terms of the note were unambiguous. 
 
Next, the Court scrutinized the terms of the note to determine whether the default interest rate was triggered at the time the note matured.  As discussed above, the note recited that upon the corporation's default and at Levy's option, "all sums owing hereunder shall, at once, become immediately due and payable.  Thereafter, interest shall accrue at the maximum legal rate permitted..."  Levy did not dispute that this language constituted an acceleration clause. 

 

Under the circumstances here, however, the Court observed that "once the promissory note matured and the lump-sum payment ... became due, the acceleration clause could not be triggered because there was nothing to accelerate." 

 

Although Levy argued that the interest rate clause was separate and apart from the acceleration clause, the Court disagreed.  It noted that "[t]he default interest language appears in the same paragraph as the acceleration clause and there is no indication in the note that this language relates to circumstances other than acceleration..."  The Court also noted that noted that Levy, who drafted the note, could have included language providing that the default interest rate applied after the note matured, but did not do so. 

 

Accordingly, the Court held that the application of the default interest rate was improper, and remanded the matter to the trial court to determine the appropriate amount owed by the corporation. 

Ralph T. Wutscher
McGinnis 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
Email: RWutscher@mtwllp.com
 

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