Article courtesy of Kevin Braun and Paige Forcier (Morgan Lewis)
Melton Tr. of Johnson Fam. Irrevocable Tr. v. Stavrakis, No. DBD-CV-24-6049118-S, 2024 WL 4490721 (Conn. Super. Ct. Oct. 10, 2024).
On December 1, 2009, the original borrower entered into a promissory note (the “Note”) in the amount of $46,800 with two lenders. In addition to the principal, the original borrower agreed under the terms of the Note to pay “twelve (12%) percent per annum on the unpaid principal balance.” The Note also imposed a late charge payable by the borrower to the lenders in an amount equal to 5% of any installment of principal and interest not paid within 15 days of the due date thereof. The Note further specified that the first payment was due on July 1, 2010, with subsequent payments due monthly until June 1, 2014. The Note was secured by a mortgage recorded against certain real property.
On November 3, 2023, the plaintiff, a successor in interest to the original borrower (“Borrower”), requested a payoff statement. The defendant, one of the two co-lenders (“Lender”), responded three days later. Borrower claimed that only $125,039.25 was due, while Lender asserted that the correct payoff amount was $337,000.23, which included compounding interest charges and late fees. Borrower subsequently filed suit, seeking a declaratory judgment to determine the correct amount due to the defendant.
The central issue in dispute was whether the interest was simple or compound. Borrower argued that the interest was simple and due only on the unpaid principal. Lender, however, contended that compound interest—interest on both the unpaid principal and accrued interest—was more appropriate. To support this position, Lender raised three arguments. First, he cited the case Charming Real Estate LLC v. Gates, WWM-CV-10-6001407-S (October 19, 2018, Cole-Chu, J.), as an example of compound interest being awarded. Second, Lender submitted an article titled “What Is a Per Annum Interest Rate?” in which the author suggested that “per annum interest” refers to compound interest. Finally, the defendant argued that the phrase “per annum” in the Note indicated that the co-lenders and the original borrower intended to apply compound interest.
The court was unpersuaded by Lender’s arguments with respect to the issue of compound versus simple interest. Judge Medina found that the case cited by Lender involved a contractually required default interest rate, not compound interest. He also ruled that the article submitted by Lender was irrelevant in determining the intentions of the original parties to the Note. While the court agreed with Lender that the Note’s text was unambiguous, it concluded that the Note was “consistent with the general rule in Connecticut that, unless otherwise agreed upon, interest means simple interest.” As a result, the court ruled in favor of the Borrower with respect to the issue of simple versus compound interest, but ordered that Borrower pay Lender the amounts due with respect to the late fees payable under the Note.
