Bernard v. First Nat. Bank of Oregon

• Jurisdiction: Oregon
• Parties: Lawrence BERNARD, an Individual, et al., Respondents, v. FIRST NATIONAL BANK OF OREGON, a National Banking Association, Appellant. HALLINAN LUMBER COMPANY, an Oregon Corporation, Respondent, v. UNITED STATES NATIONAL BANK OF OREGON, a National Banking Association, Appellant.
• Citation: 275 Or. 145,550 P.2d 1203
• Court: Oregon Supreme Court
• Decision Date: 04 June 1976

Page 1203

550 P.2d 1203

275 Or. 145

Lawrence BERNARD, an Individual, et al., Respondents, v. FIRST NATIONAL BANK OF OREGON, a National Banking

Association, Appellant.

HALLINAN LUMBER COMPANY, an Oregon Corporation, Respondent, v. UNITED STATES NATIONAL BANK OF OREGON, a National Banking

Association, Appellant.

Supreme Court of Oregon.

Argued and Submitted Oct. 29, 1975.

Decided June 4, 1976.

[275 Or. 146-A] Norman J. Wiener and Fredric A. Yerke, Portland, argued the cause for appellant First Nat. Bank of Oregon. With them on the briefs were R. Alan Wight, and Miller, Anderson, Nash, Yerke & Wiener, Portland.

[275 Or. 146-B] William M. McAllister, Portland, argued the cause for appellant U.S. Nat. Bank of Oregon. With him on the briefs were Charles F. Hinkle, and Davies, Biggs, Strayer, Stoel & Boley, Portland.

Albert E. Levy, Portland, argued the cause for respondents. On the brief were Henry A. Carey, Jr., Brad Littlefield, and Goldsmith, Siegel, Engel & Littlefield, Portland.

Before O'CONNELL, C.J., and DENECKE, HOLMAN, TONGUE, HOWELL and BRYSON, JJ.

HOLMAN, Justice.

Plaintiff Bernard and three other plaintiffs filed an action on behalf of themselves and all other borrowers similarly situated against the First National Bank of Oregon to recover 'overcharges of interest.' Plaintiff Hallinan Lumber Company filed a similar class action against the United States National Bank of Oregon, and the cases were consolidated for trial. The trial court entered an order allowing the actions to proceed as class actions and, pursuant to ORS 13.400, certified the order as one appropriate for an immediate interlocutory appeal to this court. We granted the application of each defendant to entertain the appeal.

The focus of the dispute in these class actions is the defendant banks' practice of computing interest on certain loans on the basis of a 360-day year rather than on the actual year of 365 days, a method of computation commonly referred to as the $365/360 method' or 'ordinary simple interest.' ¹ The named plaintiffs are borrowers from the banks who allegedly were charged interest by the 365/360 method. They seek to represent all other borrowers who were charged interest on the same basis during the period of the applicable statute of limitations.

The affidavits, depositions and documentary evidence submitted to the court below reveal that the defendant banks employ three different methods of computing interest depending upon the classification of the type of loan. Two of these methods, referred to as the '365/365' and '360/360' methods, produce the same amount of interest over a 365-day year without any distortion of the nominal interest rate. The third way, the '365/360' method which is at issue here, produces a greater amount of interest over a period of 365 days than either of the two other methods. In effect, the 365/360 method assesses the nominal yearly rate of interest every 360 days. Thus, over a 365-day period, the Actual interest rate exceeds the nominal interest rate by 1/72, or 1.388 per cent, of the nominal interest rate. For example, interest at the nominal rate of 8 per cent per annum computed by the 365/360 method results in 8.11 per cent interest being returned over a 365-day period. ²

The 365/360 method is apparently used by defendants only for 'commercial' loans, whereas either the 365/365 or 360/360 method is employed for real estate and consumer credit loans. None of the parties has described exactly the kinds of borrowers to which 'commercial' loans are made. In any event, the class has been defined as all borrowers who were charged interest on a 365/360 basis, rather than all commercial loan borrowers.

Plaintiffs seek to recover on alternative theories of breach of contract and money had and received. The complaints allege that plaintiffs and the members of the class entered into written loan agreements with the defendant banks which included substantially identical provisions stating that the borrower promised to pay interest 'at the rate of--percent per annum;' that the banks failed to disclose, and plaintiffs and members of the class had no knowledge that the banks computed interest on the basis of a 360-day year; and that interest was charged and paid on that basis of computation. Plaintiffs estimate that the borrowers within the class in the combined cases number 70,000 and seek a total recovery of $8,000,000 ($4,000,000 from each bank).

The banks deny the material allegations of the complaints. More importantly, they deny that they failed to disclose, and that the borrowers lacked knowledge of, the banks' practice of computing interest on a 360-day year basis.

After considering the affidavits, depositions, and documentary evidence submitted by the parties, the trial court made findings of fact and conclusions of law that the requirements of ORS 13.220(2)(c) for maintenance of a class action had been met. Defendants appeal from the order allowing the action to proceed as a class action.

The principal issue on appeal is whether the cases are proper ones for class action under ORS 13.220(2)(c), which requires, as a condition to maintenance of such an action for money damages, that common questions of law or fact predominate over questions affecting only individual members of the class. In this case such issue turns on whether it is 'likely' that final determination of the action will require separate adjudications concerning 'numerous' plaintiffs' knowledge that the banks charged interest by the 365/360 method. ORS 13.220 provides:

'13.220 Requirement for class action; when maintainable. (1) One or more members of a class may sue or be sued as representative parties on behalf of all only if:

'(a) The class is so numerous that joinder of all members is impracticable; and

'(b) There are questions of law or fact common to the class; and

'(c) The claims or defenses of the representative parties are typical of the claims or defenses of the class; and

'(d) The representative parties will fairly and adequately protect the interests of the class; and

'(e) In an action for damages under paragraph (c) of subsection (2) of this section, the representative parties have complied with the prelitigation notice provisions of ORS 13.280.

'(2) An action may be maintained as a class action if the prerequisites of subsection (1) of the section are satisfied, and in addition:

'* * *.

'(c) The court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. Common questions of law or fact shall not be deemed to predominate over questions affecting only individual members if the court finds it likely that final determination of the action will require separate adjudications of the claims of numerous members of the class, unless the separate adjudications relate primarily to the calculation of damages. The matters pertinent to the findings include:

'(A) The interest of members of the class in individually controlling the prosecution or defense of separate actions;

'(B) The extent and nature of any litigation concerning the controversy already commenced by or against members of the class;

'(C) The desirability or undesirability of concentrating the litigation of the claims in the particular forum;

'(D) The difficulties likely to be encountered in the management of a class action, including the feasibility of giving adequate notice;

'(E) The likelihood the damages to be recovered by individual class members if judgment for the class is entered are so minimal as not to warrant the intervention of the court;

'(F) After a preliminary hearing or otherwise, the determination by the court that the probability of sustaining the claim or defense is minimal.

'* * *.' (Emphasis added.)

The statute was enacted by the 1973 Legislative Assembly in the wake of this court's decision in American Timber & Trading Co. v. First Nat'l Bank, 263 Or. 1, 500 P.2d 1204 (1972), which held that class actions at Law were not permissible under then existing statutory authority. As originally proposed the act was an exact duplicate of Rule 23 of the Federal Rules of Civil Procedure, which provides the authority and guidelines for class actions in the federal courts. It emerged from committee in a significantly altered form and was passed, and the amendments form the crux of the dispute here.

In response to objections raised by opponents of the proposed procedure that insurmountable management problems would result for the court system, the Senate Judiciary Committee requested that the proponents and opponents together draft amendments in an attempt to eliminate the asserted objections. Meetings between the two groups produced the amendments which were ultimately incorporated into the bill.

Since ORS 13.220(2)(c) is central to the standards under which a class action may be maintained, it received unusual attention. The amendments added the second sentence (emphasized above) in subsection (2)(c) and also subsections (2)(c)(E) and (2)(c)(F). The source of these amendments was American College of Trial Lawyers, Report and Recommendations of the Special Committee on Rule 23 of the Federal Rules of Civil Procedure (1972). The language of the amendments is taken verbatim from the report's recommendations. The report is highly critical of class actions as they have been conducted under Rule 23. Speaking of the Rule 23 requirement that common questions must 'predominate' over questions affecting only individual members of the class, the report stated at page 7:

'Rule 23(b)(3) requires, as a prerequisite to a class action, a court finding that the questions of law and fact common to the members of the class 'predominate' over any questions affecting only individual members, and that a class action is superior to other...