Ohio courts have, on several occasions, addressed the calculation of interest in promissory notes where a stated interest such as 8.93% per annum is then computed on a calculation known as the “365/360 method.” Based on several Ohio cases, most recently in June 2011, banks with loans in Ohio may want to identify the stated specific interest rate as only a “nominal rate” and the actual rate as that which is calculated using the nominal rate and a 365/360 formula.
In 2009, a customer of a major regional bank filed a class action claiming breach of the promissory note based on use of the 365/360 method. The note stated interest was calculated on the unpaid principal balance at an interest rate of 8.93% but further stated:
“The annual interest rate for this Note is computed on a 365/360 basis; that is, 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.”
The class action plaintiff alleged the use of the 365/360 method resulted in an actual interest rate of 9.05% per annum instead of 8.93% per annum.
At the trial court level, the bank sought summary judgment, arguing that the Note meant that interest payments would be calculated from the 8.93% interest rate using the 365/360 method. The plaintiff argued the stated 8.93% per annum rate is unambiguous and cannot be modified by an unintelligible 365/360 formula that results in more than 8.93% interest. The trial court granted the bank summary judgment. On appeal, the Appellate Court reversed.
The Appeals Court first reviewed two prior decisions in Ohio: Hamilton v. Ohio Savings Bank, 637 N.E. 2d 887 (Ohio 1994) and Ely Ents., Inc. v. FirstMerit Bank, N.A., 925 N.E. 2d 1003 (Ohio 2010). In Hamilton, Ohio’s Supreme Court reversed the summary judgment for a bank concluding there were issues of fact. Although Hamilton dealt with disclosure issues, the case involved allegations of overcharged interest based on the 365/360 method and the action was allowed to proceed as a class action. In Ely, a commercial borrower asserted a class action based on the 365/360 method which resulted in an effective interest rate of 11.153% instead of the stated 11% provided in the Note. Based on the precedent in Ely & Hamilton, the Ohio appeal court ruled that the Note was a standardized document between parties of unequal bargaining power with an ambiguity. The Appellate Court noted the underlying court described the formula as “unintelligible” stating “how can a calculation that is supposed to result in an ‘annual interest rate’ start with the ‘annual interest rate’ if it isn’t both divided and multiplied by the same number?” Based on this finding, the formula was “unintelligible.” In order to grant the bank summary judgment, the trial court rewrote the calculation to simply state that “the annual interest rate for this note is computed on a 365/360 basis.” While the trial court noted the method is accepted shorthand for a commonly used formula, it never defined the formula. The Appellate Court found that the 365/360 formula does not clearly evidence the intent of the parties to alter the ordinary meaning of the term “per annum” or to create an annual interest rate other than the stated 8.93% interest. As a result, the summary judgment for the bank was reversed and remanded for further proceedings.
This decision may be found at JNT Properties, LLC v. KeyBank, N.A. 2011 Ohio 3260 (Ohio Appeal, 8th District, Cuyahoga) (June 30, 2011).