In a July 12, 2011, opinion, the First District of the Illinois Appellate Court once again held that the Interest Act did not prohibit a lender from using a 365/360 basis to calculate interest, so long as the method of calculation is clearly set forth in the note. Asset Exchange II, LLC v. First Choice Bank, No. 1-10-3718 (July 12, 2011). In affirming the trial court's dismissal of the plaintiff's class action based on Sections 9 and 10 of the Illinois Interest Act, 815 ILCS 205/0.01 et seq., the Court made clear that none of the provisions of the Act is applicable to commercial transactions. The decision is important for commercial lenders, who have faced class action lawsuits asserting claims under the Interest Act in recent years, but the Court also reiterated its prior holding in a recent case that the Interest Act does not prohibit the use of a 365/360 method to calculate interest.
In Asset Exchange, the plaintiff was a limited liability company that borrowed $1.25 million from the defendant. Included in the promissory note was a stated interest rate and a provision stating that the annual interest for the note would be computed using a 365/360 basis. Two years later, the plaintiff filed a seven-count class action complaint, asserting claims under the Interest Act, the Promissory Note and Bank Holiday Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, and for common-law fraud and breach of contract. The plaintiff's basic claims were that the interest rate in the note violated Sections 9 and 10 of the Interest Act and that the defendant fraudulently failed to disclose the method of calculating interest in the note. The defendant moved to dismiss, the Court dismissed all counts, and plaintiff appealed.
In its appeal, the plaintiff argued that the trial court misapplied the Interest Act and erred in dismissing the breach of contract and fraud claims. The appellate court affirmed the trial court on all counts.
With respect to the Interest Act claim, the Court took the opportunity to clarify the scope of the Act. Its recent decision in RBS Citizens Nat'l Ass'n v. RTG-Oak Lawn, LLC, 407 Ill. App. 3d 183 (1st Dist. 2011), which affirmed the dismissal of a very similar 365/360 claim, provided a sufficient basis for the Court to affirm the dismissal of the plaintiff's claim, but the Court apparently decided to settle a larger question of the Act's scope. Citing a federal court opinion in Bank of America N.A. v. Shelbourne Dev. Group, Inc., 732 F. Supp. 2d 809, 821 (N.D. Ill. 2010), as well as some older state court cases, the Court stated that Section 4 of the Interest Act plainly excluded commercial loans from the Act's coverage. Section 4 provides that it is lawful to charge "any rate or amount of interest or compensation with respect to . . . [a]ny loan made to a corporation." 815 ILCS 205/4(1)(a). In the past, there was some question as to whether this provision applied generally to the Interest Act as a whole, or only to its provisions regarding usury. The Court explained that Section 4 applies generally, and therefore barred the plaintiff's Interest Act claim.
As in RBS Citizens, the plaintiff's Interest Act claim also failed because the Court found that the Interest Act does not prohibit the use of a 365/360 basis in calculating interest. The Court also used a similar analysis to that used in RBS Citizens to dispose of the plaintiff's arguments regarding its breach of contract and fraud claims. The Court held that the defendant could not have breached the contract or defrauded the plaintiff by using a 365/360 basis when the note at issue clearly stated the method to be used to calculate interest.
Despite the Court's attempt to frame its decision as following on a long line of caselaw in the state and federal courts, this case represents the first time that an Illinois appellate court has found that the Interest Act does not apply to commercial loans. However, the decision provides additional ammunition for non-commercial lenders defending claims regarding their use of a 365/360 basis to calculate interest.