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05/08/89 Michael K. Carollo Et Al., v. Financial Federal Savings

May 8, 1989





MICHAEL K. CAROLLO et al., on behalf of themselves and all

538 N.E.2d 884, 182 Ill. App. 3d 996, 131 Ill. Dec. 509

Appeal from the Circuit Court of Cook County; the Hon. Robert L. Sklodowski, Judge, presiding. 1989.IL.694


JUSTICE CAMPBELL delivered the opinion of the court. BUCKLEY and O'CONNOR, JJ., concur.


Plaintiffs, Michael K. Carollo and Nancy L. Carollo, filed an action on behalf of themselves and all other persons similarly indebted on mortgage loans to the defendant, Financial Federal Savings and Loan Association (Financial Federal). Plaintiffs appeal from the granting of a motion to dismiss their complaint against defendant. In their complaint plaintiffs contend that Financial Federal breached the mortgage loan agreement between it and plaintiffs by requiring plaintiffs to pay a full month's interest upon plaintiffs' mid-month prepayment in full of their mortgage loan to Financial Federal.

The facts are undisputed. On November 13, 1979, plaintiffs entered into a mortgage loan agreement with Financial Federal whereby plaintiffs borrowed $55,100 from Financial Federal. Plaintiffs' note of indebtedness to Financial Federal was secured by a mortgage on a new residence acquired by plaintiffs located in Lynwood, Illinois. The note provided that plaintiffs were to repay their indebtedness to Financial Federal by making monthly installment payments of $511.69 from January 1, 1980, through December 1, 2008. An interest charge of 10 5/8% per annum was assessed on the unpaid principal balance. Monthly installments on the note were due on the first day of each month over the course of the term of the note.

From January 1980 through October 1986, plaintiffs made monthly installments to Financial Federal, as required by the note. On November 3, 1986, plaintiffs notified Financial Federal that they wished to prepay their indebtedness on the note since they were in the process of selling their house. Plaintiffs were advised by Financial Federal that the amount necessary to prepay their indebtedness through November 30, 1986, was $52,729.43. This amount consisted of the outstanding principal balance of $52,246.89 plus the $925.20 interest due on the outstanding balance for the months of October and November 1986, together with a release fee of $50, minus the accumulated balance in the escrow account of $492.66. On November 15, 1986, Financial Federal received a check from plaintiffs in the amount of $52,729.43.

On July 13, 1987, plaintiffs filed a complaint alleging that Financial Federal had breached the mortgage loan agreement in connection with the charging of interest for the full month of November 1986, following plaintiffs' prepayment of the entire loan amount on November 15, 1986. Plaintiffs sought to bring their action against Financial Federal on behalf of themselves and all others similarly situated. The trial court, after reviewing the briefs filed by the parties and hearing oral argument, granted Financial Federal's motion to dismiss plaintiffs' complaint and plaintiffs appeal.

Plaintiffs argue on appeal that Financial Federal's policy of requiring mortgagors to pay interest on their outstanding loan balance for an entire monthly period, even though they have completely paid off their loan prior to the end of such monthly period, constitutes a violation of the provisions of the standard mortgage and loan documents used by Financial Federal for home mortgage transactions. Financial Federal maintains that the agreement between the parties specifically contemplates the charging of a full month's interest upon the premature, mid-month retirement of the plaintiffs' indebtedness.

The practice of charging interest in advance on mortgage loans has repeatedly been upheld by Illinois courts. (Beaty v. Land of Lincoln Savings & Loan (1984), 127 Ill. App. 3d 248, 468 N.E.2d 1259; Wishnoff v. Guardian Savings & Loan Association (1975), 34 Ill. App. 3d 107, 339 N.E.2d 494; Goodman v. Advance Mortgage Corp. (1975), 34 Ill. App. 3d 307, 339 N.E.2d 257.) In Wishnoff, the plaintiffs prepaid the monthly interest in advance on their mortgage loan and later in the month elected to pay off the remaining balance on the loan, but they did not receive a refund for the interest collected during that part of the month after which the loan was fully paid. The plaintiffs brought an action for unjust enrichment and for an accounting. This court held that the plaintiffs were not entitled to a partial refund of interest where the terms of the mortgage note provided that monthly interest was payable in advance on the first of the month. The operative language of the mortgage note provided:

"Interest for each month shall be added to the unpaid balance on the first day of each month at the rate of one-twelfth (1/12) of the annual interest rate and shall be calculated upon the unpaid balance due as of the last day of the preceding month."

In rejecting the plaintiffs' contention that the portion of the prepaid interest allocable to the part of the month during which there was no outstanding principal was "unearned," the court held that interest was to be charged and collected in accordance with the language of the debt instrument. Since the subject note provided for the payment of monthly advance interest and did not contain a provision for a rebate of interest upon prepayment of the loan, the interest was "earned" within the terms of the parties' contract. The court ...

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