Land of Lincoln Goodwill Indus., Inc. v. PNC Fin. Servs. Grp., Inc.

• Decision Date: 12 August 2014
• Docket Number: No. 13–2860.,13–2860.
• Parties: LAND OF LINCOLN GOODWILL INDUSTRIES, INC., an Illinois Not for Profit Corporation, Plaintiff–Appellant, v. The PNC FINANCIAL SERVICES GROUP, INC., a/k/a PNC Bank, NA, a national bank, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

762 F.3d 673

LAND OF LINCOLN GOODWILL INDUSTRIES, INC., an Illinois Not for Profit Corporation, Plaintiff–Appellant,

v.The PNC FINANCIAL SERVICES GROUP, INC., a/k/a PNC Bank, NA, a national bank, Defendant–Appellee.

No. 13–2860.

United States Court of Appeals,Seventh Circuit.

Argued Dec. 13, 2013.

Decided Aug. 12, 2014.

Thomas J. Immel, Attorney, Feldman, Wasser, Draper & Cox, Springfield, IL, for Plaintiff–Appellant.

Todd Andrew Rowden, Attorney, Thompson Coburn, Chicago, IL, for Defendant–Appellee.

Before EASTERBROOK, KANNE, and ROVNER, Circuit Judges.

ROVNER, Circuit Judge.

When Land of Lincoln Goodwill Industries, Inc. (“Goodwill”) informed its lender, PNC Financial Services Group, Inc. (“PNC”), that it intended to pay off the balance of its twenty-year loan early, PNC notified Goodwill that it would owe a prepayment charge in excess of $300,000. Goodwill filed suit seeking a declaratory judgment that it owes no such fee under the terms of its agreement with PNC. The district court concluded otherwise. It reasoned that because the contract terms impose a charge when prepayment is made “during a period when the unpaid principal balance bears interest, or is scheduled to bear interest, at a fixed rate,” and Goodwill gave notice of its intent to prepay the balance of the loan during a ten-year period when interest on the loan was accruing at a rate of 4.79 percent per annum, Goodwill owes PNC a prepayment fee. R. 17; see Land of Lincoln Goodwill Indus., Inc. v. PNC Fin. Servs. Grp., 2013 WL 2446375 (C.D.Ill. June 5, 2013). Goodwill appeals, contending that because the loan agreement called for a one-time adjustment of the interest rate ten years into the twenty-year loan period, at no time during the loan will interest accrue at a fixed rate, and consequently at no time will its prepayment trigger a charge. Because Goodwill's reading is contrary to the plain terms of the contract and would render one of its terms a nullity, we reject that reading and affirm the district court's judgment.

I.

The loan transaction underlying the agreement in this case took place in October 2007 among Goodwill, Sangamon County, Illinois (the “County”), and PNC's predecessor, National City Bank (“National City”). The County agreed to issue $2 million in economic development revenue bonds and loan the proceeds to Goodwill for purposes of a development project. That project involved the acquisition and renovation of a building in Springfield to establish a retail thrift store along with training and counseling facilities for Goodwill's clients and administrative facilities for its staff. The loan was for a period of twenty years. National City purchased the bonds and by so doing funded the loan to Goodwill. The transaction was evidenced by a loan agreement and promissory note, and the loan was secured by a mortgage on the project. The County's rights under the loan agreement were assigned to National City, which the loan agreement referred to as both the “Assignee” and the “Purchaser.” PNC acquired National City on December 31, 2008, and succeeded to National City's rights under the agreement. For the sake of simplicity, we shall omit further mention of National City and substitute PNC in its place.

Although dated September 1, 2007, the loan agreement was signed on October 5, 2007, and the term of the loan commenced as of the latter date. The agreement and the note obligate Goodwill to make monthly payments of principal together with interest at one of two specified rates. The agreement specifies an “Initial Rate” of interest for the first ten years of the loan and an “Adjusted Rate” for the second ten years. The Initial Rate is deemed to be 4.79 percent per annum. That rate will apply until the Interest Rate Adjustment Date, which is identified as October 5, 2017 (ten years into the loan). The Adjusted Rate is defined as “the rate calculated on the Interest Rate Adjustment Date by Purchaser equal to the Purchaser's Cost of Funds on the Interest Rate Adjustment Date plus .80%.” R. 1–1 at 15.

The parties entered into the loan agreement on the assumption that the Bonds constituted tax-exempt private activity bonds issued for a qualified purpose to be undertaken by a not-for-profit, section 501(c)(3) entity (Goodwill) and that, as a result, the interest paid to the bondholder (PNC) would not be includable in its gross income. Anticipating the possibility that this assumption could turn out to be mistaken, and that interest on the bonds might later be deemed to be taxable, the loan agreement specifies that if and when a determination of taxability comes to pass, interest on the loan will thereafter accrue at a Taxable Interest Rate. The agreement defines the Taxable Interest Rate as “a rate of interest per annum equal to the Base Rate from time to time in effect.” R. 1–1 at 21. The Base Rate is in turn defined as “the floating, daily, variable rate per annum of interest determined and announced by the Assignee from time to time as its ‘Base Lending Rate’....” R. 1–1 at 15. The Taxable Interest Rate is thus a variable rate. No determination of taxability has come to pass, but the agreement's provision for that possibility, including a variable Taxable Interest Rate that would apply in that event, sheds some light on the proper understanding of the terms governing a prepayment charge.

Article IV of the loan agreement specifies that the bond proceeds will be paid into a project fund to finance Goodwill's acquisition and renovation of the project property. Any unused funds are to be transferred from the project fund to a bond fund from which principal and interest payments to PNC are made and applied as set out in section 9.3 of the agreement and section 5 of the County resolution that authorized issuance of the bonds. We note these provisions of Article IV not because they are at issue in this case, but because they provide context for section 9.3 of Article IX, to which we turn next.

Article IX of the loan agreement confirms that Goodwill has the right to prepay, in whole or in part, the principal balance owed on the note and identifies the circumstances under which Goodwill, if it exercises that option, will owe PNC a prepayment charge. The purpose of such a charge is to protect the lender against the loss of bargain it will incur if its borrower chooses to prepay the outstanding balance of the loan at a time when market rates have fallen below the interest rate specified by the loan. See River East Plaza, L.L.C. v. Variable Annuity Life Ins. Co., 498 F.3d 718, 721 (7th Cir.2007); In re LHD Realty Corp., 726 F.2d 327, 330 (7th Cir.1984). We reproduce the first four sections of Article IX here, omitting certain provisions (such as how prepayment may be made and how it is to be credited) that are not relevant to the arguments made in this case.

ARTICLE IX

PREPAYMENT OF THE NOTE

Section 9.1 General Optional Prepayment

The principal installments of the Note are subject to prepayment (concurrently with prepayment of the Bonds) at the option of [Goodwill] at any time, in whole or part, subject to the following prepayment charge (the “Prepayment Charge”):

(a) [Goodwill] shall have the right to prepay the principal installments of the Note in whole or part, provided, that ... (iii) concurrently with the prepayment of the entire unpaid principal balance of the Note, [Goodwill] shall prepay the accrued interest on the principal being prepaid.

(b) If the Note is:

(i) prepaid, in whole or in part, during a period when the unpaid principal balance bears interest, or is scheduled to bear interest, at a fixed rate, or

(ii) accelerated after the occurrence of an Event of Default hereunder, during a period when the unpaid principal balance bears interest, or is scheduled to bear interest, at a fixed rate,

and if, on the date of the occurrence of either (i) or (ii) above, ... on the date of any subsequent prepayment for which a Funding Cost Recovery Charge is determined (each a “Determination Date”), the Reinvestment Rate is less than the Funding Cost, then a “Funding Cost Recovery Charge”, computed in accordance with the terms of the Funding Cost Recovery Charge Addendum, shall be payable by [Goodwill] to [PNC] at the time of prepayment or acceleration as applicable....

The terms “Reinvestment Rate” and “Funding Cost” are defined in the Funding Cost Recovery Charge Addendum. [Goodwill's] execution of this Loan Agreement and the Note shall constitute acknowledgment that [Goodwill] has received a complete copy of the Funding Cost Recovery Charge Addendum. [PNC's] determination of the Funding Cost Recovery Charge shall be conclusive absent manifest error.

Section 9.2. Optional Prepayment if Tax Exemption is Lost.

If there shall have been made a Determination of Taxability, [Goodwill] shall have the option to prepay the Note in whole. The amount to be prepaid pursuant to this Section shall be equal to the principal amount of all Outstanding Bonds, plus accrued interest at the Taxable Interest Rate to their redemption date to the extent the interest is taxable income to the Registered Owners of the Bonds, plus any applicable Prepayment Charge.... In the event [Goodwill] does not exercise the instant option to redeem, then (i) the interest payable on all Notes then outstanding shall be adjusted to the Taxable Interest Rate, and (ii) [PNC] may demand prepayment by [Goodwill] of the Note.

Section 9.3. Mandatory Prepayment upon Transfer from Project Fund.

If any amounts are transferred from the Project Fund to the Bond Fund pursuant to Section 4.5 of this Loan Agreement, [Goodwill] shall prepay the Note in an amount equal to the principal amount of the Bonds required to be redeemed on such an occurrence pursuant to Section 5 of the Bond Resolution, plus any applicable Prepayment Charge. Said amount shall be paid by [Goodwill] to [PNC] not later than the date the Bonds are to be redeemed pursuant to such provision.

[Goodwill] will promptly...