Inland Bank and Trust v. Knight

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State: Illinois

Court: 1st District Appellate

Docket No: 1-09-0262 Rel

Case Date: 03/19/2010

Preview:FIFTH DIVISION March 19, 2010

No. 1-09-0262

INLAND BANK AND TRUST, f/k/a WESTBANK, an Illinois Banking Corporation,

) ) ) Plaintiff-Appellee, ) ) v. ) ) CARLTON W. KNIGHT, CHICAGO TITLE ) LAND TRUST CO., as Successor Trustee to ) N.A.B. Bank, as Trustee under Trust Agreement ) No. 2-107-0, UNITED STATES OF AMERICA, ) UNKNOWN BENEFICIARIES OF CHICAGO ) LAND TRUST COMPANY TRUST NO. 2-107-0, ) CITY OF CHICAGO, a Municipal Corporation, ) UNKNOWN OWNERS, AND NONRECORD ) CLAIMANTS, ) ) Defendants-Appellants. ) ) )

Appeal from the Circuit Court Cook County.

07 CH 10840

Honorable Darryl B. Simko, Judge Presiding.

JUSTICE LAVIN delivered the opinion of the court: This current appeal concerns a mortgage foreclosure action brought by plaintiff-appellee Inland Bank and Trust (Inland) on an apartment complex. Defendants-appellants appeal an order by the circuit court granting Inland's motion to strike defendants' affirmative defenses to the foreclosure complaint and a counterclaim alleging a violation of the Interest Act (815 ILCS 205/1 et seq. (West 2006)). BACKGROUND In 2003, Carlton W. Knight refinanced a mortgage loan through Westbank, Inland's

1-09-0262 predecessor, on a 3-building, 41-unit multifamily apartment complex in Harvey, Illinois. Westbank loaned Knight $1,120,000, which was secured by a mortgage on the real estate. The note providing the terms of the loan (Note) contained a number of provisions dictating various interest rates. The Note first provided for a variable interest rate as the stated interest rate: "VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Wall Street Journal Prime (the 'Index'). The Index is not necessarily the lowest rate charge by Lender on its loans. *** The Index currently is 4.000% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 2.250 percentage points over the Index, rounded to the nearest 0.125 percent, resulting in a rate of 6.250% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law." A provision identified as "LATE CHARGE" stated that "[i]f a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment." Finally, the Note also provided for an interest rate after default, which is the primary provision at issue here: "INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, Lender at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 7.250 percentage points over the Index. The interest rate will not exceed the maximum rate permitted by applicable law." Eventually, the loan went into default and Inland sued to foreclose on April 19, 2007. Knight

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1-09-0262 filed an "Amended Answer to the Foreclosure Complaint, Affirmative Defenses and Counterclaim" which alleged, inter alia, that the interest after default provision of the Note violated section 4.1a(f) of the Interest Act (815 ILCS 205/4.1a(f) (West 2006)), section 2F of the Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/2F (West 2006)), and constituted an unenforceable penalty. Inland moved to strike Knight's affirmative defenses and dismiss the counterclaim. It argued that no provisions in the Note were in violation of any law. The parties fully briefed and argued the motion at length before the circuit court and on November 18, 2008, the circuit court granted Inland's motion. Knight filed a motion to reconsider but it was ultimately denied. Defendants timely appeal. ANALYSIS On appeal, defendants first contend that the Note's "interest after default" provision violates section 4.1a(f) of the Interest Act. The issues in the instant case involve questions of law and statutory interpretation and therefore, the standard of review is de novo. People v. Hall, 195 Ill. 2d 1, 21 (2000). Section 4.1a(f) of the Interest Act provides that: "[I]f the agreement governing the loan so provides, for each installment in default for a period of not less than 10 days, a charge in an amount not in excess of 5% of such loan installment. Only one delinquency charge may be collected on any such loan installment regardless of the period during which it remains in default." 815 ILCS 205/4.1a(f) (West 2006).

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1-09-0262 Section 4 of the Interest Act provides, in pertinent part, that it is lawful for a state bank to receive or contract to collect interest and charges at any rate agreed upon with business loans secured by a mortgage on real estate. 815 ILCS 205/4(1)(l) (West 2006). Both parties cite U.S. Bank National Ass'n v. Clark, 216 Ill. 2d 334 (2005). Knight, the borrower, argues that the Note's default interest provision violates section 4.1a(f). Inland, on the other hand, argues that Clark actually supports its position. Not to be unduly contrarian, but we find that Clark provides little support to either party here. The supreme court in Clark addressed the juxtaposition that then existed between section 4 and section 4.1a of the Interest Act. The supreme court noted that section 4, after being amended in 1981 and 1982, permitted the receipt of any rate or amount of interest or compensation on any real estate mortgage. 815 ILCS 205/4(1)(l) (West 2006). Clark noted that section 4.1a restricted the same "broad category of costs" that section 4 addressed to 3% when a loan's interest rate exceeded 8%. Clark, 216 Ill. 2d at 348; see 815 ILCS 205/4.1a (West 2006). After a lengthy discussion, the supreme court concluded that the 1981 and 1982 amendments to section 4 implicitly repealed section 4.1a's limitations on noninterest charges. Clark, 216 Ill. 2d at 349. The supreme court then found that a 1992 amendment to section 4.1a (adding section 4.1a(f), the section at issue here), did not represent a reenactment of the limitations provided for in section 4.1a that had been implicitly repealed by the previous amendments. The only conclusions from Clark that appear relevant to our consideration of this appeal are that section 4.1a(f) did not reenact the previously repealed limitations on interest and that section 4 permits the receipt of any rate or amount of interest on any real estate mortgage. The

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1-09-0262 gravamen of the issue here, however, is not which sections are in force but rather which section is applicable to the "interest after default" provision in the Note. On this more narrow point, defendants argue that section 4.1a(f) is applicable while Inland argues that section 4 applies. We must first determine how default interest should be characterized before deciding what section of the Interest Act controls here. A default interest provision serves to protect mortgage lenders' expectations. A pertinent article in the Real Property, Probate & Trust Journal (cited by the parties during circuit court proceedings) offers a comprehensive explanation: "Default interest provisions are designed to compensate the lender for a wide range of losses and risks, both those flowing from the particular defaulted loan and borrower and those from the pool of defaulted loans that the borrower has joined. Among other things, these losses include: the loss of regular contract interest income during the term of the loan; the opportunity costs of foregoing other investments during the default period; the need for regulated lenders to place additional money on reserve based on defaulted loans in their portfolio (which diverts money from income-producing investments); the possibility that the negative impact of a nonperforming loan on the lender's balance sheet could cause regulatory problems and make obtaining funding in the credit markets more expensive; and the additional internal administrative costs the lender must incur to monitor and otherwise deal with a defaulted loan." S. Bender & M. Madison, The Enforceability of Default Interest in Real Estate Mortgages, 43 Real Prop. Prob. & Tr. J. 199, 201-02 (2008). In short, the article explains that default interest serves as a vehicle for liquidated damages as

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1-09-0262 opposed to penalties. Historically, Illinois courts have treated default interest in the same way. For example, in Chemical Bank v. American National Bank & Trust Co. of Chicago, 180 Ill. App. 3d 219 (1989), this court treated default interest provision as liquidated damages and not a penalty provision and found that such a provision was valid and enforceable. Cases dating back to 1873 have held similarly. See Baker v. Loves Park Savings & Loan Ass'n, 61 Ill. 2d 119, 127 (1975) (stating that "maker of a note may stipulate to pay a higher interest rate after maturity and the additional amount will not be considered a penalty but will be considered liquidated damages"); Downey v. Beach, 78 Ill. 53 (1875) (provision increasing interest on note upon maturity for unpaid portion was considered a penalty, but was in the form of liquidated damages and was enforceable); Bane v. Gridley, 67 Ill. 388, 390 (1873) (although increase rate of interest in consequence of nonpayment at maturity was identified as a "penalty," supreme court would treat it as "merely liquidated damages"). Defendants cite In re AE Hotel Venture, 321 B.R. 209 (Bankr. N.D. Ill. 2005) to support their point of view. There, the bankruptcy court held that a creditor was not entitled to postpetition default interest, finding that default interest was not "true interest" but a form of "late charge." In re AE Hotel Venture, 321 B.R. at 215-16. As a charge, it was subject to provisions within the Bankruptcy Code dealing with "charges." See 11 U.S.C.

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