Creditor Entitled to Simple Interest on Defaulted Note Unless Parties Agreed to or Statute Allows Compounding
2008-2363 and 2009-0170. Mayer v. Medancic, Slip Opinion No. 2009-Ohio-6190.
Geauga App. Nos. 2008-G-2826, 2008-G-2827, and 2008-G-2828, 2008-Ohio-5531. Certified question answered in the negative, judgment of the court of appeals reversed, and cause remanded to the trial court.
Moyer, C.J., and Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Pfeifer, J., concurs in judgment only.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2009/2009-Ohio-6190.pdf 
View oral argument video of this case.
(Dec. 3, 2009) The Supreme Court of Ohio ruled 7-0 today that pursuant to R.C. 1343.02, when a debtor defaults on a written instrument that specifies an interest rate payable on the unpaid balance, and there is no agreement of the parties or another statutory provision expressly authorizing the compounding of interest, the creditor is entitled to simple interest on the unpaid amount until payment is made.
The Court also held that after a debtor defaults on a written instrument, simple interest accrues on the entire amount owed, which includes both the unpaid principal and the interest that was due and payable to the creditor at the time of the default. The Court’s decision, which reversed a ruling by the 11th District Court of Appeals, was authored by Justice Maureen O’Connor.
The case involves a long-running dispute between creditors Robert and Marcia Mayer and several members of the Medancic family arising from three promissory notes on which the Mayers claim that the Medancics defaulted. The Mayers filed foreclosure actions on the notes, and obtained court judgments ordering the Medancics to repay the unpaid balance of the notes plus interest.
As part of extensive post-judgment litigation, the Medancics moved the trial court to declare that the rate of postjudgment interest owed on the notes was the statutory rate set forth in R.C. 1343.03. In response, the Mayers argued: 1) that they were entitled to postjudgment interest at the rates set forth in the notes, and 2) that the interest should be compounded annually until the debt is paid. In April 2006, the trial court ruled that the Mayers were entitled to postjudgment interest at the rates set forth in the notes, but rejected their claim that they were entitled to compound interest. The Mayers appealed the denial of compound interest.
On review, the 11th District Court of Appeals reversed the trial court and held that, based on a 1943 Supreme Court of Ohio decision, State ex rel. Bruml v. Brooklyn, the Mayers were entitled to recover compound interest on the unpaid amounts of the promissory notes until the debts were satisfied. The 11th District certified that its ruling on the issue of compound interest was in conflict with a 1993 decision of the 10th District Court of Appeals on the same legal question. The Supreme Court agreed to review the case.
In today’s decision, Justice O’Connor wrote that the 11th District erred in interpreting the Bruml decision to authorize compounding of interest absent an agreement of the parties or an express statutory provision authorizing compound interest.
“In Bruml,” she wrote, “the court held that ‘[u]nder a contract for the payment of interest at a specified rate annually, whereon there is a default of payment of such interest when due, interest on interest will be computed at the regular rate.’ ... Bruml does not allow for the collection of compound interest for two reasons. First, Bruml allows only ‘interest on interest,’ which is not the same as the annually compounded interest that appellees seek. ... Second, although Bruml allowed interest to accrue periodically on interest that was due, but not paid, the case involved an investment bond that expressly provided for the periodic payment of interest. The notes in this case provide for no such periodic payment.”
Because the investment bond at issue in Bruml expressly called for the periodic payment of interest, Justice O’Connor observed, “Interest due, but not paid, periodically became part of the amount owed to the bondholder, and subsequent interest was properly calculated based on that total. Contrary to Bruml, each note in this case provided for only one payment of interest, which was due on the same date as the repayment of the principal. Because the notes did not provide for periodic payments of interest, the interest due on the notes is not periodically added to the amount on which future interest may be calculated. ... ‘Generally, a right to interest on unpaid obligations accrues on the date of schedule payment, and runs until paid ...’ Principal and interest earned on the notes were due on November 1, 1995, and November 1, 1997. Therefore, pursuant to R.C. 1343.02, simple interest continues to accrue on the principal and interest due on the notes at the rates set forth therein from those dates until payment is made.”
Justice O’Connor’s opinion was joined by Chief Justice Thomas J. Moyer and Justices Evelyn Lundberg Stratton, Terrence O’Donnell, Judith Ann Lanzinger and Robert R. Cupp. Justice Paul E. Pfeifer concurred in judgment only.
Contacts
Joel A. Nash, 216.691.3000, for Mario Medancic et al.
Timothy T. Brick, 216.241.5310, for Marcia and Robert Mayer.
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