On June 30, 2011, the Eighth District Court of Appeals in Cuyahoga County, Ohio decided the case of JNT Properties, LLC v. KeyBank, Nat'l Assoc., which dealt with the calculation of interest on a commercial loan by what is known as the "365/360 method." The court held that KeyBank's interest calculation method for the loan was unintelligible because although a provision toward the top of the note contained a stated annual interest rate of a certain percentage, that provision was contradicted by another term in the note relating to calculation of interest. Accordingly, lenders using the common "365/360 method" should ensure that their loan documents clearly and intelligibly describe the calculation of interest.
The case originated when JNT Properties filed a class action against KeyBank, alleging breach of contract based on KeyBank's use of the "365/360 method" for the calculation of interest. The promissory note in question stated that the "Initial Interest Rate" was 8.93%, but then elsewhere in the document stated as follows:
The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ration 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.
By KeyBank's calculation method, this formula resulted in an effective interest rate of approximately 9.05% per annum. After originally landing in the Eight District Court of Appeals in Cuyahoga County, Ohio on a motion to dismiss, the case was remanded back to the trial court. The trial court granted KeyBank's motion for summary judgment, finding that although the "verbal" formula was unintelligible, there was no evidence suggesting that JNT either did not consent to the use of the "365/360 method" or intended the use of some other method.
The Eighth District came to a different conclusion. The Eighth District agreed that the formula was unintelligible, but did not think that the reference to the "365/360 method" was sufficient to stand alone and support KeyBank's interest calculation. Relying on the rule that ambiguities in standardized written contracts between parties of unequal bargaining power should be interpreted strictly against the drafter, the Eighth District instead found that the reference to 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."
Ultimately, this decision could render unenforceable the "365/360 method" in a number of commonly used loan documents. This case should serve as a warning to all lenders in Ohio. Lenders should seek professional guidance on crafting "365/360 method" language to ensure that they receive their expected yield and avoid costly and unnecessary litigation.