|October 23, 2012|
Previously published on October 19, 2012
The U.S. Court of Appeals for the 8th Circuit has ruled that when a promissory note clearly stated that interest was calculated according to the 365/360 method rather than the 365/365 method, the borrower was not charged excessive interest by the lender when it calculated interest accordingly.
Kreisler & Kreisler, LLC obtained a $48,407 commercial loan from National City Bank, predecessor to PNC Bank. The promissory note specified that annual interest would be “computed on a 365/360 basis; that is, by applying the ratio of the annual interest 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 promissory note contained a “variable interest rate” provision providing that the interest rate would be at 1.000 percentage point over the bank’s prime rate, which is the “fluctuating rate per annum which is publicly announced from time to time by Lender.”
Kreisler filed a class action lawsuit against the bank on behalf of commercial borrowers whose promissory notes contained similar language regarding interest. The suit alleged that the bank charged excessive interest-101.389% of the agreed-upon interest rate-by using 360 days rather than 12 calendar months to calculate the annual interest rate. Kreisler argued that the 365/360 term in the payment provision of the promissory note conflicted with the phrase “per annum” in the variable interest rate section, and that the use of “per annum” in the variable interest rate provision required use of the 365/365 method.
The Court of Appeals explained that banks “have developed three approaches for establishing the time factor to address the impossibility of calculating equal daily and equal monthly interest charges throughout the year.” Such approaches are: 365/365 method (exact day interest), the 360/360 method (ordinary interest) and the 365/360 (bank interest). The court noted that the 365/360 method was the method most often used. It explained that “[b]ecause the numerator and denominator do not match as they do in other methods, the 365/360 method increases the effective interest rate by .01389 in a non-leap year.”
The Court of Appeals affirmed the District Court’s decision to dismiss Kreisler’s case. It found that the promissory note plainly explained both “the time factor and the method for calculating interest, which the Bank followed.” Looking at the “payment” section of the promissory note, the court explained that the promissory note first stated that the annual interest rate for the note was computed on a 365/360 basis, and the second clause specified exactly how a 365/360 basis calculation works. The court then looked at the “variable interest rate” section, and explained that the section did not “specify a time factor when setting the interest rate.” As a result, the court found it necessary to look to the “payment” provision to fill this gap. Looking at the two provisions together, the court found that the method of calculation and the effective rate were clear. The court further explained that use of the term “per annum” in the “variable interest rate” section was not in conflict with the 365/360 method of calculating interest because depending on the method specified in the note, the year of the note may be a 365 day year or a 360 day year. The court did state that the payment provision of the note “may have been clearer had it stated that the ‘annual interest,” rather than the ‘interest rate,’ is calculated on a 365/360 basis.”
This case is cited as Kreisler & Kreisler, LLC v. National City Bank, 657 F.3d 729 (8th Cir. 2011).