Commercial lenders will be glad to learn the Supreme Court of Ohio recently released a slip opinion overturning the Eighth District Court of Appeals' decision in JNT Properties, LLC v. KeyBank, Nat'l Assoc. and concluding that KeyBank's use of a "365/360" method of interest calculation in a commercial promissory note was not ambiguous.
As previously reported in our July 2011 and January 2012 blog posts, this case concerned KeyBank's use of the 365/360 method of interest calculation. The promissory note at issue set the initial interest rate at 8.93% per annum, but also 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 Court of Appeals held on June 30, 2011, that the language describing the 365/360 method could not "be read as clearly evidencing an intent of the parties to alter the ordinary meaning of the term 'per annum,' or as creating an 'annual interest rate' other than the stated rate of 8.93 percent." (The use of the 365/360 method of computation resulted instead in an effective interest rate of 9.05% per annum.)
On appeal by KeyBank, which was supported by an amici curae brief of the American Bankers Association and the Ohio Bankers League, the Supreme Court of Ohio reversed. The Supreme Court found that although the note's payment clause inartfully referred to computation of the "annual interest rate" rather than "annual interest," the imprecision was "not so confusing that a reasonable person would think that the rate set by the note would be calculated using something other than 365/360 method." The court recognized that the 365/360 method is the most commonly used method of interest calculation in commercial loans and that it was "clear that the term being defined [was] not the annual interest rate but rather the method of computing regular interest payments."
Although the ultimate result in JNT Properties came out in favor of the lender, lenders should seek experienced legal guidance when crafting interest calculation language to increase the likelihood that they receive the expected yield and avoid unnecessary litigation.