Kleiner v. First Nat. Bank of Atlanta

• Decision Date: 28 February 1984
• Docket Number: Civ. No. C80-921,C81-1553.
• Citation: 581 F. Supp. 955
• Parties: Jackie KLEINER v. The FIRST NATIONAL BANK OF ATLANTA. George W. MOROSANI v. The FIRST NATIONAL BANK OF ATLANTA.
• Court: U.S. District Court — Northern District of Georgia

581 F. Supp. 955

Jackie KLEINER v. The FIRST NATIONAL BANK OF ATLANTA.

George W. MOROSANI v. The FIRST NATIONAL BANK OF ATLANTA.

Civ. Nos. C80-921, C81-1553.

United States District Court, N.D. Georgia, Atlanta Division.

February 28, 1984.

COPYRIGHT MATERIAL OMITTED

Robert B. Remar, Jonathan A. Zimring, Remar, Arnold & Zimring, Jerome J. Froelich, Jr., Kenneth P. McDuffie, Atlanta, Ga., for plaintiff Kleiner.

Jerome J. Froelich, Jr., Kenneth P. McDuffie, Atlanta, Ga., Michael P. Malakoff, Pittsburgh, Pa., for plaintiff Morosani.

Trammel E. Vickery, Kent Mast, William B.B. Smith, James A. Gilbert, Hansell, Post, Brandon & Dorsey, C.B. Rogers, Rogers & Hardin, Atlanta, Ga., for First National Bank of Atlanta.

ORDER

ORINDA D. EVANS, District Judge.

These consolidated cases are before the court on the Plaintiffs' motion for partial summary judgment on their claims that the Bank breached its obligation to them by not charging interest on their loans in the manner set in the notes signed by Plaintiffs.¹ After consideration, the court finds that the record does not establish as a matter of law that the Bank breached an obligation to Plaintiffs or that Plaintiffs are otherwise entitled to recover. Therefore, the motion for partial summary judgment is DENIED.

The court has certified three plaintiff classes of borrowers — the "promissory note" class, the "real estate note" class, and the "per annum" class. Id. at 698, as amended by Orders of June 29, 1983 and February 4, 1984. Members of the promissory note class signed notes stating that interest would be paid at a rate of

___ percent per annum in excess of the rate charged by the bank from time to time to its best Commercial borrowers with respect to ninety (90) day borrowings (the "Prime Rate").

Members of the real estate note class signed notes stating that interest would accrue at a rate of

___ percent per annum plus the "prime rate" currently charged from time to time by the bank to its best and most credit worthy customers.... If at any time or from time to time such prime rate increases or decreases, then the rate of interest hereunder shall be correspondingly increased or decreased effective on the day on which any such increase or decrease of such prime rate is publicly announced. In the event that the bank, during the term hereof, shall abolish or abandon the practice of publishing the prime rate, or should the same become unascertainable, Holder shall designate a comparable reference rate which shall be deemed to be the "prime rate" hereunder.

Members of the per annum class signed notes stating that interest was to be calculated on a "per annum" basis.

I. Promissory Note and Real Estate Note Claims

Before turning to the specific issues presented, it is helpful to summarize certain basic contract principles which apply and also to summarize the parties' differing contentions.

First, it is axiomatic that a note is a contract. Specifically, it is a unilateral form of contract in which the borrower, in exchange for the bank's act of lending money, makes a promise to repay the loan at a certain time with certain interest. Hence, the promises normally are made by the borrower, not the lender. Indeed, the lender usually does not sign the note. Since an action for breach of contract is based on breach of a promise, careful attention must be given to isolating exactly what express or implied promise, if any, the Bank made to Plaintiffs.

The contract analysis has a unique twist here because the notes did not specify a numerical rate of interest. Instead, they called for interest payments tied to the Bank's "prime rate," a rate set unilaterally by the Bank at variable intervals before and after execution of the notes. Thus these questions arise: Did the notes permit the Bank to set the prime rate at whatever numerical rate it chose, and require the customer to pay interest on his note accordingly? Or did the notes or any legal principle obligate the Bank to observe limitations in setting its prime rate? If so, what are those limitations?

The respective arguments of the parties are now summarized. Plaintiffs' argument is that in the above-quoted language from the notes, the Bank promised it would undertake to identify "its best Commercial borrowers with respect to ninety (90) day borrowings" (excerpt from the promissory note) and "its best and most credit worthy customers" (excerpt from the real estate note). Further, the Plaintiffs implicitly argue that the Bank committed to set its prime rate in accordance with the rate it was willing to charge these specifically identified customers. Since the Bank has admitted in discovery that it never has undertaken to identify its most credit worthy customers as a discrete group, and further has admitted that certain large corporate customers paid less than the "prime rate," Plaintiffs argue that the Bank has breached a contractual obligation. On that basis, they argue they are entitled to partial summary judgment on the issue of breach of promise.

The Bank, on the other hand takes the position, implicitly at least, that the notes place no contractual limitations on it in setting the prime rate. It argues that the term "prime rate" has an established trade meaning, which is "our announced rate," and that this meaning applies regardless of how the term "prime rate" is defined or described in a given note. The Bank further argues that the references in the notes to the most creditworthy customers, etc., are meaningless formulaic expressions. Ergo, there is nothing in the loan agreements to indicate that the parties meant to disregard trade meaning, and the notes evidence clear mutual intent to permit the Bank to announce as its prime rate any rate it chose to announce. Alternatively, the Bank argues that the interest rate provisions of the notes are ambiguous and that extrinsic evidence of the parties' intentions is therefore essential to determine their agreement; hence, partial summary judgment for Plaintiffs would be inappropriate.

For the reasons hereinafter set forth, the court rejects Plaintiffs' argument that the Bank had a contractual duty to identify a discrete group of customers as the most creditworthy in order to set its prime rate. It also rejects any contention that charging below-prime rates to certain customers was a per se breach of a contractual duty to Plaintiffs. However, the court finds that the Plaintiffs' breach of contract claim might be cognizable on a theory that the Bank breached an obligation of good faith toward Plaintiffs in setting its prime rate. Alternatively, Plaintiffs may proceed on a theory that they are entitled to recoup claimed overpayments of interest.²

Although the Bank and the Plaintiffs discuss the two note forms (the promissory note and the real estate note) as if a single problem of contract interpretation were presented, the court finds a fundamental difference in the interest rate language used in the notes. Accordingly, they are considered separately hereinafter.

A. Promissory Note

The interest rate terms in the promissory notes state the rate of interest as a certain rate above "the rate charged by the bank from time to time to its best Commercial borrowers with respect to ninety (90) day borrowings (the "Prime Rate"). The court finds that this language reflects the parties' intention to define the term "Prime Rate" as "the rate charged by the bank from time to time to its best Commercial borrowers with respect to ninety (90) day borrowings." The factors which lead to this conclusion are (1) the placement of the term "Prime Rate" immediately after the definitional language; (2) the placement of the term Prime Rate in quotation marks within parentheses; (3) the capitalization of the term Prime Rate both within the parentheses and thereafter in the body of the note; and (4) the reasonable specificity of the definitional language.

The definition of the "Prime Rate" in these notes can be divided into three parts for purposes of interpretation: it is a rate (1) charged from time to time (2) to the Bank's best commercial borrowers (3) on 90-day borrowings.

The Bank argues that the definition is but a formula, devoid of content, that carries the same trade meaning as the term prime rate. Were there one formula generally in use to signify a rate of interest announced as such by the Bank, this argument might deserve closer consideration. The Bank has neither asserted nor proved that this is the case. The affidavits of banking officials submitted to the court state that the term, prime rate, however defined or described, means the rate announced as such by a bank. The affidavits do not suggest that there is one formulaic definition of prime rate that itself carries a generally understood trade meaning. More importantly, the affidavits refer to the obverse of the situation before the court. Here, the base rate characteristics are specified, and then the base rate is given the name "Prime Rate." The term "Prime Rate" here is a shorthand reference to the definition; the definition is not a meaningless phrase appended to the term. Hence, acceptance of the Bank's "trade usage" theory would be tantamount to depriving the parties of the right to set contractual terms of their choosing.

Although the definition of the base rate is not meaningless, two of its three parts require construction by the court. O.C. G.A. § 13-2-1. What is the meaning of the phrases "charged from time to time" and "the Bank's best Commercial borrowers"? Plaintiff Kleiner³ asserts that the Bank was obligated to identify its most creditworthy customers and set a prime rate which equaled the lowest rate charged to any commercial borrower for a 90-day period while his promissory notes were outstanding.

The court finds that "from time to time" is a reference to the fact that the prime rate changes at variable intervals when the Bank desires to change it. "The Bank's best Commercial borrowers" must be...