RSBS Citizen v. RTGO

The Appellate Court of Illinois for the First District recently held that an interest provision in a loan agreement was not ambiguous and therefore the borrower was not entitled to claims under the Interest Act, good faith and fair dealing, and statutory and consumer fraud, based on alleged misrepresentations and ambiguity in the interest provision.

The borrower and lender entered into a loan agreement to finance the development of a residential condominium project. After the borrower defaulted on the loan, the parties executed a series of forbearance agreements. The loan remained unpaid and ultimately the lender filed a complaint for foreclosure.

The borrowers filed an answer, affirmative defenses and counterclaims based on alleged violations of the Illinois Interest Act (815 ILCS 205/1, et seq.), the duty of good faith and fair dealing, the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA) (815 ILCS 505/1, et seq.), and common law fraud. The borrower’s allegations revolved around the general contention that the lender did not disclose its method of computing and charging interest, and unlawfully increased the amount of interest charged on the loan.

The lender moved to strike and dismiss all affirmative defenses and counterclaims. The circuit court granted the motion, dismissing the affirmative defenses and counterclaims with prejudice. The circuit court later denied a motion to reconsider its dismissal, and the borrowers appealed.

In upholding the circuit court, the appellate court first examined language in the forbearance agreement signed by the borrower that provided that the borrower had “no claims or defenses to the enforcement of the rights and remedies of Lender thereunder,” and that the agreements and relevant loan documents “constitute the legal, valid and binding obligations of Borrower, enforceable against it in accordance with their respective terms, and Borrower has no valid defense to the enforcement of such obligations.” The court noted that the forbearance agreements containing a waiver of defenses were executed in 2008, and the alleged offenses occurred upon the execution of the Note in 2005.

The appellate court held that Illinois law permits a party to contractually waive all defenses, though the duty of good faith and fair dealing is not waived absent an

“express disavowal,” which the appellate court found the above language did not do. However, the appellate court noted that a waiver of defenses was inapplicable to claims originating under the ICFA.

Nevertheless, the appellate court found the waiver of defenses was essentially part of the consideration that the lender received in exchange for a forbearance agreement. It noted that it “would be inclined to find that defendants also waived any affirmative defense or counterclaim based upon the Interest Act and common law fraud.” However, the Court “nevertheless address[ed] defendants’ contentions for the sake of completeness.”

The Court noted that each of the borrowers’ affirmative defenses and counterclaims revolved around the same basic theory – that the borrowers were mislead as to the amount of interest that would be paid under the loan. The court noted that there are generally three different methods lenders use to compute interest: the 365/365 method, 360/360 method, and 365/360 method.

The lender utilized the 365/360 method when charging interest under the loan, but the borrowers argued that the loan identified the rate as “per annum,” which they argued is defined as “by the year.” The relevant portion of the loan provided as follows with respect to interest charged: “Interest shall be computed on the principal balance outstanding from time to time, on the basis of a three hundred sixty (360) day year, but shall be charged for the actual number of days within the period for which interest is being charged.”

The Court noted that the phrase per annum does not appear in the interest provision. The Court therefore found that there was no ambiguity in the language and that the loan provided for the 365/360 method of interest calculation. Therefore, the appellate court held that the lender did not violate the Interest Act.

The Court next discussed the claims revolving around a duty of good faith and fair dealing. It noted that they occur “when one party is given broad discretion in performing its obligations under the contract.” The plaintiff borrowers alleged that the defendant lender breached this duty by (1) “deliberately creat[ing] ambiguity in the language of the loan documents” as to the calculation of interest; and (2) “exercise[ing] its discretion to calculate interest in a manner that charged *** more interest than Defendants reasonably expected.” The Court first noted that the duty of good faith and fair dealing, did “not arise out of precontractual actions and is only applicable to the conduct of parties to an existing contract.” Accordingly, it held that any allegations relating to the formation of the loan agreement did not implicate or violate the duty of good faith and fair dealing. The Court further found that since the agreement was not ambiguous, the lender did not exercise any discretion and therefore the second argument was also without merit.

With respect to the statutory and common law fraud claims, the Court noted that the borrowers’ fraud claims were predicated upon an assertion that the interest calculation method was deceptive and based upon misrepresentations and false statements. The Court held that there could be no statutory or common law fraud because there was no evidence of any impropriety or deception on the part of the lender and because it already determined that the loan agreement was unambiguous.

Finally, the appellate court found that the claims were properly dismissed with prejudice because the borrowers would not be able to cure the defect in the claims simply be repleading. However, the Court denied the lender’s request for sanctions against the borrowers for filing a frivolous appeal, noting that while it was unpersuaded by the borrowers’ arguments, it was not unreasonable that the borrowers would appeal the circuit court’s decision given that the primary issues on appeal were subject to de novo review and largely dependent upon an interpretation of a single contract provision.