Antitrust Law Daily Wrap Up, FALSE ADVERTISING—NDCal: Interest Rate Calculation Method Was Not False Advertising Without Misleading Statement, (Oct 30, 2012)

By John W. Arden, J.D., LLM.

A borrower of real estate loans, claiming that a bank applied a method to calculate interest that gave it five extra days of interest per year without notice, failed to state a claim for false advertising under the California Unfair Competition Law, according to a federal magistrate judge in the federal district court in San Francisco (Three Crown Apartments v. PNC Bank, October 26, 2012, Laporte, E.). The borrower’s claim was dismissed, with leave to amend, because it failed to allege that the bank—which serviced but did not originate the loan—made any misleading statement.

The borrower (Three Crown Apartments) alleged that PNC Bank was—or reasonably should have been—aware that using the “365/360” method to collect interest in excess of the stated rate for promissory notes, without giving notice to borrowers, is false advertising. It further alleged that PNC Bank did not follow the industry standard for giving notice to borrowers of this 365/360 calculation.

Section 17500 of the California Unfair Competition Law prohibits negligent or intentional dissemination advertising that is “untrue or misleading” and that is known or should be known to be untrue or misleading.

In this case, Three Crown Apartments alleged that its promissory note contained misrepresentations with respect to the 365/360 interest calculation. However, there were no allegations that PNC Bank—the loan servicer but not the loan originator—made any statements to the public about the promissory note or any other document, the magistrate judge found. There were no allegations that PNC had any involvement in the drafting of the promissory note or made any statements regarding the interest rate in its assumption agreement.

Three Crown Apartments argued that PNC currently collected on the promissory note and the assumption agreement and has made ongoing representations about the interest calculation in bills, annual statements, and tax forms. These all asserted that the interest due on the note was something other than what was included on the note, according to Three Crowns. However, no allegations about these additional representations were made in the complaint.

Three Crown further claimed that PNC’s withdrawals from its account constituted a misleading statement. It offered no persuasive authority for interpreting this conduct as a misleading statement within the meaning of the California Unfair Competition Law, the magistrate judge observed.

PNC asserted that the language of the note was unambiguous and not deceptive, citing out-of-circuit cases. However, three of those cases involved contracts including the language “365/360 basis,” unlike the promissory note in this case.

The complaint included no allegations of communications between Three Crown and PNC regarding the interest rate that could form the basis for a false advertising claim. However, Three Crown could make additional allegations regarding subsequent communications to support such a claim, the magistrate judge stated. Thus, the motion to dismiss the false advertising claim was granted, but with leave to amend the complaint.

The case is No. C-12-03579 EDL.

William McGrane (McGrane LLP) for Three Crown Apartments. Andrew S. Elliott (Severson & Werson) for PNC Bank.

Cases: Advertising StateUnfairTradePractices CaliforniaNews