Hubbard St. Lofts LLC v. Inland Bank

• Citation: 357 Ill.Dec. 309,963 N.E.2d 262,2011 IL App (1st) 102640
• Decision Date: 13 December 2011
• Docket Number: No. 1–10–2640.,1–10–2640.
• Parties: HUBBARD STREET LOFTS LLC and Andrew Ruttenberg, on Behalf of Themselves and All Those Similarly Situated, Plaintiffs–Appellants, v. INLAND BANK, as Successor in Interest to AmeriMark Bank, Defendant–Appellee.
• Court: United States Appellate Court of Illinois

2011 IL App (1st) 102640
357 Ill.Dec. 309
963 N.E.2d 262

HUBBARD STREET LOFTS LLC and Andrew Ruttenberg, on Behalf of Themselves and All Those Similarly Situated, Plaintiffs–Appellants,
v.
INLAND BANK, as Successor in Interest to AmeriMark Bank, Defendant–Appellee.

No. 1–10–2640.

Appellate Court of Illinois, First District, Second Division.

Dec. 13, 2011.

[963 N.E.2d 263]

Segal, McCambridge, Singer & Mahoney, Ltd., Chicago (Steven A. Hart,

[963 N.E.2d 264]

Scott W. Henry, and Anastasios T. Foukas, of counsel), for appellants.

Foley & Lardner LLP, Chicago (William J. McKenna, Thomas C. Hardy, of counsel), for appellee.

OPINION Justice CUNNINGHAM delivered the judgment of the court, with opinion.

[357 Ill.Dec. 311] ¶ 1 This appeal arises from a July 28, 2010 order entered by the circuit court of Cook County, which granted defendant-appellee Inland Bank's motion to dismiss a class action complaint on all counts with prejudice. On appeal, the appellants, Hubbard Street Lofts LLC and Andrew Ruttenberg, argue that: (1) the trial court erred in dismissing the counts for breach of contract, violation of the Illinois Interest Act (Interest Act) (815 ILCS 205/1 et seq. (West 2010)), and declaratory judgment in the appellants' complaint because the court misinterpreted sections 9 and 10 of the Interest Act; (2) the trial court improperly dismissed the breach of contract count in the appellants' complaint because the promissory note was ambiguous; and (3) the trial court erred in dismissing the counts for breach of the oral loan preparation contract, violation of the Consumer Fraud and Deceptive Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 2010)), and common law fraud in the appellants' complaint because the promissory note at issue was written and signed by the parties. For the following reasons, we affirm the judgment of the circuit court of Cook County.

¶ 2 BACKGROUND

¶ 3 On or around March 17, 2006, plaintiffs-appellants Hubbard Street Lofts, LLC and Andrew Ruttenberg (collectively, Hubbard Street Lofts) obtained a loan of $6,400,000 from AmeriMark Bank, whose successor in interest in this case is Inland Bank. Hubbard Street Lofts claim that prior to the drafting of the promissory note (the Note), the parties had an agreement that Hubbard Street Lofts would pay AmeriMark Bank a fee to draft a loan document based on the representation that the interest rate on the loan would be 8.000% per year. The Note contained in the record is the loan document that memorialized the parties' agreement. The Note is 1 1/2 pages long and contains multiple sections that are at issue in the case including:

(1) The heading, which states:

“Principal Amount: $6,400,000.00 Initial Rate: 8.000% Date of Note: March 17, 2006”

(2) The payment section, which states (in relevant part):

“PAYMENT. * * * 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.”

(3) The variable interest rate section, which states:

“VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is Lender's Prime Rate (the ‘index’). This is the rate Lender charges, or would charge, on 90–day unsecured loans to the most creditworthy corporate customers. This rate may or may not be the lowest rate available from Lender at any given time. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each [357 Ill.Dec. 312]

[963 N.E.2d 265]

Day. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 7.500% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 0.500 percentage points over the index, resulting in an Initial rate of 8.000% per annum. NOTICE: Under no circumstances will the Interest rate of this Note be more than the maximum rate allowed by applicable law.”

(4) The signature clause, which states:

“PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.”

¶ 4 Most notable is the payment section of the Note and the way it provides for interest to be calculated. A recent decision in the Illinois Appellate Court, First District, shed some light on the different methods of interest calculation that are currently used by lenders. This court noted that banks generally use three different methods of computing interest, which are the 365/365 method (exact-day interest), the 360/360 method (ordinary interest), and the 365/360 method (bank interest). Asset Exchange II, LLC v. First Choice Bank, 2011 IL App (1st) 103718, ¶ 20, 352 Ill.Dec. 207, 953 N.E.2d 446 (quoting In re Oil Spill by the “Amoco Cadiz” off the Coast of France on March 16, 1978, No. 92–3282, 1993 WL 360955, *1–2 (7th Cir. Sept. 14, 1993)). ¹ The exact-day method is calculated by taking an interest rate, dividing it by 365, and then applying it to each day of the year. The ordinary interest rate method is calculated the same way, only using 360 as the number of days instead of 365. The 365/360 bank method, which was used in the Note in the instant case, is slightly different. It is calculated by first dividing the interest rate by 360, and then applying it to each day in a 365- or 366-day year. This effectively allows the banks to charge an extra five or six days of interest each year. The application of this method is the basis of the parties' dispute in this case.

¶ 5 On December 9, 2009, Hubbard Street Lofts filed a seven-count class action lawsuit against AmeriMark Bank in the circuit court of Cook County, claiming that: (1) AmeriMark Bank breached the contract with Hubbard Street Lofts by charging an interest rate above the rate permitted by the Interest Act and the Promissory Note and Bank Holiday Act (Promissory Note Act) (815 ILCS 105/0.01 et seq. (West 2010)); (2) AmeriMark Bank breached an oral loan preparation contract; (3) AmeriMark Bank charging interest using a 365/360 method of calculation violated the Interest Act; (4) AmeriMark Bank breached the duty of good faith and fair dealing; (5) AmeriMark Bank violated the Consumer Fraud Act; (6) AmeriMark Bank committed common law fraud; and (7) seeking declaratory judgment in relation to Hubbard Street Lofts' Interest Act claims. On January 15, 2010, Inland Bank filed an appearance as the successor in interest for AmeriMark Bank. Hubbard Street Lofts then moved for substitution of judge which was granted on February 3, 2010.

¶ 6 On February 16, 2010, Inland Bank filed a motion to dismiss the complaint pursuant to [357 Ill.Dec. 313]

[963 N.E.2d 266]

section 2–615 of the Illinois Code of Civil Procedure (735 ILCS 5/2–615 (West 2010)), and to strike the class allegations pursuant to section 2–801 of the Illinois Code of Civil Procedure (735 ILCS 5/2–801 (West 2010)). Hubbard Street Lofts filed a response to Inland Bank's motion on March 24, 2010, that claimed that: (1) the complaint could not be dismissed because the Note is ambiguous and permits multiple interpretations; (2) Hubbard Street Lofts sufficiently stated a cause of action under the Interest Act; (3) Inland Bank had discretion in the manner it charged interest to Hubbard Street Lofts and used this discretion in violation of the duty of good faith and fair dealing; (4) Inland Bank committed common law fraud; and (5) class actions are not limited to individuals.² Hubbard Street Lofts also filed a supplemental response to Inland Bank's motion asking the court to follow the reasoning used in Martinucci v. First Suburban National Bank of Maywood, No. 09 L 12936 (Cir. Ct. Cook Co.).

¶ 7 On July 28, 2010, the trial court heard oral arguments by both parties. Inland Bank argued that the Interest Act did not apply to the Note in this case and that Hubbard Street Lofts' first, third and seventh counts based on the Interest Act were therefore resolved. Inland Bank also claimed the that Credit Agreements Act (Credit Agreements Act) (815 ILCS 160/0.01 et seq. (West 2010)) barred Hubbard Street Lofts' second count for breach of an oral loan preparation contract and that Hubbard Street Lofts should not be certified as a class. Hubbard Street Lofts argued that the Note is ambiguous; that the Interest Act applies to the Note and prescribes that the interest be calculated over a full 12–month year consisting of 365 days (the exact-day method); and that the Credit Agreement Act does not apply in this case to bar their breach of an oral loan preparation contract count. The trial court held that the Credit Agreements Act did in fact bar Hubbard Street Lofts' count for breach of an oral loan preparation contract. The trial court also found sua sponte that the Credit Agreements Act also barred Hubbard Street Lofts' breach of duty of good faith and fair dealing count, Consumer Fraud Act count, and common law fraud count. The trial court reasoned that these counts were based on alleged oral agreements that were not memorialized by the Note, and thus these counts were “exactly the types of claims that the [Credit Agreements] Act is designed to foreclose.” The trial court found that despite the deficiencies under the Credit Agreements Act, Hubbard Street Lofts' Consumer Fraud Act count would fail because Hubbard Street Lofts are sophisticated business persons and therefore not “consumers” under the Consumer Fraud Act that affords protection. Also, the trial court held that the common law fraud count would fail for lack of specificity. Regarding Hubbard Street Lofts' Interest Act claims, the trial court found that the Interest Act is a gap-filling provision and does not apply to the Note because the parties agreed...