APPEAL from the Circuit Court of Cook County; the Hon. DONALD
J. O'BRIEN, Judge, presiding.
MR. JUSTICE EGAN DELIVERED THE OPINION OF THE COURT:
The plaintiffs, Harold L. Perlman, individually and as the controlling member of, and as agent for 1000 Lake Shore Drive, a joint venture, and Continental Sales & Enterprises, Inc. filed a three-count complaint on behalf of themselves and as representatives on behalf of all other persons similarly situated against the defendant, the First National Bank of Chicago, hereafter referred to as "the Bank." Count III was stricken on the Bank's motion.
Count I alleged as follows:
1000 Lake Shore Drive executed and delivered a promissory note dated May 31, 1965, prepared by the Bank for a loan of $1,200,000 providing for interest at the rate of 5% per annum payable semi-annually. On January 12, 1966, 1000 Lake Shore Drive executed a promissory note prepared by the Bank for a loan of an additional $500,000 at the rate of 5 1/2% interest per annum. The Bank at no time before July 15, 1970, disclosed that it had been and was computing interest at a rate higher than 5% or 5 1/2% on the respective notes.
Perlman had been a depositor and customer of the Bank since 1931, who relied on the Bank's reputation for accuracy and trustworthiness and assumed that the interest charges as stated in the notices he received from the Bank were in accordance with the terms of the notes, namely on a per annum or 365-day year basis.
Continental Sales & Enterprises, Inc. and Perlman individually had borrowed sums of money and executed promissory notes in 1963 and 1967 respectively at interest of 5 1/2% per annum.
On July 8, 1970, Perlman, after receiving a notice of interest due, wrote to the Bank questioning the amount. On July 15, Richard K. Charlton, the Assistant Vice-President of the Bank, sent Perlman a letter notifying him that the interest calculation was not a mistake or clerical error; that "divisional term loans" are calculated on the actual number of days on a 360-day year basis, which is the "standard bank basis" and, as far as he knew, "a universal bank practice"; and that he did not feel the Bank could alter the method of interest calculation which had "considerable precedence historically throughout the banking industry."
The Bank had the following amounts of loans outstanding as of the following dates:
December 31, 1960 $1,725,000,000 December 31, 1964 2,196,000,000 December 31, 1965 2,717,500,000 December 31, 1966 2,899,500,000 December 31, 1967 3,249,700,000 December 31, 1968 3,640,000,000 December 31, 1969 4,186,000,000 June 30, 1970 4,549,000,000
The defendant had been calculating and collecting interest on many of those loans on a 360-day year basis without disclosing the method or basis to many of the borrowers. Many of those loans were for sums of $100,000 or less, and since the amount illegally collected from some borrowers was small, they could not providently expend the funds necessary to prosecute their claims separately. The plaintiffs on information and belief alleged that many of the borrowers whose loans were in excess of $100,000 had not and would not prosecute their individual claims for collection of the illegal interest charged because they were fearful such prosecution would result in the Bank's refusal to accommodate their financial requirements.
The complaint further alleged that the plaintiffs and the thousands of persons composing the class on whose behalf the relief was sought shared a community of interest in the subject matter and in the relief sought and prayed for a declaration that:
1. The phrase "per annum" or "per year" or "annually" as contained in any promissory note or other instruments of indebtedness evidencing loans made by the defendant Bank to all borrowers upon which interest has been collected for periods of 30 days or more means a year of 12 calendar months consisting of 365 days, except for leap year which consists of 366 days.
2. The calculation of interest, computation of time and interest, and collection of interest on any promissory note or other instrument of indebtedness specifying that interest be paid per annum or per year by a method of using a 360-day year instead of a calendar year of 365 days is illegal and contrary to the provisions of Sections 9 and 10 of the Illinois Interest Statute unless such method is expressly stipulated in the promissory notes or other instruments of indebtedness or otherwise expressly agreed to by the borrower.
In Count II the plaintiffs prayed for an accounting of the amount of interest illegally collected from the plaintiffs and all other persons similarly situated during the 10 years preceding the filing of the complaint; since the Bank had been unjustly enriched by the aggregate amount of interest illegally collected that a constructive trust be impressed on the funds disclosed by the Bank's accounting and that the court direct the Bank to make restitution and refund the illegally collected interest to the persons entitled thereto; that the court appoint representatives for the purpose of supervising and administering the accounting and collection of interest to be refunded by the Bank; and that the court allow reasonable attorney's fees for services of the plaintiffs' counsel out of the funds collected.
In its answer, the Bank admitted that it did and would continue to compute interest on a 360-day basis. It denied that the named plaintiffs and the persons that they purport to represent were unaware that the Bank was computing interest on a basis of a 360-day year until July 15, 1970; that the Bank had been and was collecting interest without disclosing the standard bank basis of computation; that many of the loans were for $100,000 or less; and that there was a community of interest in the subject matter and the relief sought among the representative plaintiffs and the thousands composing the class on whose behalf the relief was sought.
In addition, the defendant advanced several affirmative defenses. For reasons to be discussed later, we will set them out verbatim:
"First Affirmative Defense
1. The Complaint fails to state a cause of action.
Second Affimative Defense
2. The action was not commenced within five years of the time it accrued to plaintiffs.
Third Affirmative Defense
3. According to the longstanding and notorious commercial practice, custom and usage, of which plaintiffs knew or reasonably should have known, notes such as those executed by plaintiffs import the use of a 360-day daily basis for computing interest. Plaintiffs manifested no intention not to be bound by this practice, custom and usage and accordingly agreed to the use of said basis, which was the basis applied by defendant with respect to the notes in issue.
Fourth Affirmative Defense
4. For many years prior to filing the Complaint, plaintiffs engaged in a course of dealing with defendant in which plaintiffs severally or in combination executed debt instruments with defendant, received funds and applied them for commercial profit, and paid interest as computed and charged on a 360-day daily basis. For many years prior to filing the Complaint plaintiffs severally or in combination continued to execute further debt instruments in order to borrow funds from defendant and apply them for commercial profit, after plaintiffs had paid interest as computed and charged by defendant on a 360-day daily basis with respect to previously executed debt instruments.
5. Plaintiffs knew or reasonably should have known as of each payment of interest by them that the standard bank practice of a 360-day daily basis was being applied and yet did not seek to negotiate a modification of that practice by express stipulation in the instrument and continued to borrow and apply for commercial profit the funds of defendant. Defendant relied upon the reasonable assumption that a 360-day daily basis of computing interest was applicable.
6. It would be unjust and inequitable to permit plaintiffs and other members of the class they purport to represent now to change their position and contend that a basis other than the 360-day daily basis was applicable. Defendant would be seriously prejudiced by a change from the standard bank basis for computing interest.
7. Plaintiffs have ratified and acquiesced in the conduct and practice of defendant complained of, have waived their cause of action, are guilty of laches and are barred and estopped from maintaining this action.
Fifth Affirmative Defense
8. The action is barred by virtue of the National Bank Act (Act of June 3, 1864, c. 106) as amended, and rules and regulations promulgated pursuant thereto."
Only the third and fourth affirmative defenses are in issue before us.
The plaintiffs' reply to the affirmative defenses, in substance, denied that there was a longstanding and notorious commercial practice, custom and usage, and alleged that the "`standard bank practice' was and is repugnant to and conflicts with notes and other instruments of indebtedness which provide for the computation of interest on a per annum basis and violates the statutes of Illinois"; and that "Defendant's use of the 360-day basis for computing interest was contrary to and inconsistent with the provisions of the notes ...