Court Opinion

ID: 3000984
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:11:25.101267+00
Date Added: 2024-06-11T13:38:29.605320
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 06-3856
RIVER EAST PLAZA, L.L.C., formerly known as
MCL CLYBOURN SQUARE SOUTH, L.L.C.,
                                               Plaintiff-Appellee,
                                v.

THE VARIABLE ANNUITY LIFE INSURANCE COMPANY,
               Defendant-Third Party Plaintiff-Appellant,

                                v.

DANIEL E. MCLEAN,
                            Third Party Defendant-Appellee.
                         ____________
           Appeal from the United States District Court
      for the Northern District of Illinois, Eastern Division.
            No. 03 C 4354—John W. Darrah, Judge.
                         ____________
    ARGUED APRIL 11, 2007—DECIDED AUGUST 22, 2007
                     ____________

 Before CUDAHY, KANNE, and WOOD, Circuit Judges.
  KANNE, Circuit Judge. This diversity case involves
a loan used to finance a significant commercial real estate
development. When the borrower sold the property and
pre-paid the loan, it balked at paying a “prepayment fee”
according to the terms of the note. The borrower eventu-
2                                                No. 06-3856

ally paid the fee, subject to a reservation of rights, and
sued the lender. After a bench trial, the district court
entered judgment in favor of the borrower and the lender
now appeals. For the reasons set forth below, we reverse
the judgment of the district court and remand the case
for further proceedings.

                        I. HISTORY
  River East Plaza, L.L.C. (River East) is a real estate
developer.1 Third party defendant Daniel E. McLean is
the president of River East. River East had worked with
another party to develop a large retail store on the north
side of Chicago. In 1999, the other developer offered to
sell its share of the project to River East for roughly
$12 million. River East, through a mortgage broker,
shopped around for a loan to allow it to buy out the other
developer’s share. Variable Annuity Life Insurance Com-
pany (VALIC) offered to meet River East’s demand for a
closing date before the end of the year and agreed to an
interest rate that River East wanted. Among the other
terms of VALIC’s offer was a “yield maintenance” prepay-
ment clause. A yield maintenance prepayment clause is
an attempt to ensure that prepayment does not deprive
the lender of the yield that they bargained for over the life
of the loan.
  The final version of the note contained a yield mainte-
nance calculation which the parties describe as “Treasury-
flat.” To arrive at the amount of the yield maintenance
fee in the event that River East decided to prepay, the

1
  Some of the actions described herein were performed by the
parties’ predecessors in interest or by subsidiaries of the
parties. For clarity, we will uniformly refer to the parties by
their current names as used in this appeal.
No. 06-3856                                               3

parties would need to know the outstanding principal as of
the date of prepayment and the scheduled loan payments
from that date to maturity. They would also need to
determine the prevailing interest rate on United States
Treasury bonds or notes maturing closest to the loan’s
maturity date of January 2020 (“Treasuries”). With those
three amounts in hand, the clause calculates the difference
between the scheduled payments and potential interest
if the prepaid principal were invested in Treasuries. That
amount is compared to an amount equal to one percent of
the outstanding principal. The larger of these two numbers
is then compared with the highest rate allowed by law,
and the lesser of those two numbers is the yield mainte-
nance fee. In short, the remaining interest due under the
note is discounted by the current interest rate on Treasur-
ies. The provision is described as Treasury-flat because
parties can (and apparently occasionally do) negotiate a
discount rate that is different from the Treasury yield.
  Some examples are in order. If River East decided to
exercise the privilege of prepayment and interest rates had
fallen since the time that the loan was funded, River East
would be on the hook to pay VALIC the difference between
what VALIC would have received in interest over the life
of the loan and what VALIC could receive by investing
the prepaid principal into Treasuries. Assuming that
VALIC placed the unexpected principal into Treasuries
and received the prepayment fee from River East, the
expected yield that VALIC bargained for would be “main-
tained” by River East supplementing the interest on the
reinvested funds with the prepayment fee. If, however,
River East prepaid the loan and interest rates had risen
substantially in the interim, the interest on the Treasuries
would presumably exceed the interest rate called for in
the loan and the prepayment fee would equal the minimum
fee of one percent of the outstanding principal. But in no
4                                               No. 06-3856

case would the fee exceed the maximum interest
rate allowed by law.
  The parties dickered over several of the terms in the
note. River East sought to have the yield maintenance fee
removed, but VALIC refused. Prior to closing, River East’s
counsel offered to both parties a seven-page opinion letter
that, among many other opinions, “express[ed] no opinion
as to the enforceability of any provision . . . providing
for a prepayment premium in the event . . . such premium
is held to be a penalty.” Appellant’s App. at 183F. Never-
theless, the parties went forward with the closing.
  Several years later, River East sought to sell the prop-
erty. The tenant had a right of first refusal, and offered to
purchase the property. But the tenant would not assume
the loan. River East eventually sold the property to the
tenant and prepaid the loan.
  The parties then began to dispute the size and
enforceability of the prepayment penalty. River East
eventually paid the penalty under protest, and brought
suit in the state courts of Illinois. VALIC removed the case
to the federal district court and counter-claimed against
River East and McLean for costs and fees. The parties
agree that, due to a mathematical error, VALIC’s agent
had overcharged River East by nearly one million dollars
when it computed the prepayment fee. VALIC returned the
overcharge, with interest, but the parties still dispute
whether the amount returned was the correct amount. The
district court conducted a bench trial, and entered judg-
ment in favor of River East on the question of whether
the prepayment fee was enforceable under Illinois law.
The district court did not enter judgment on the question
of whether VALIC had accurately returned the over-
charge (that question being moot due to the court’s first
holding), and the court dismissed VALIC’s cross-claim.
This appeal followed.
No. 06-3856                                               5

                      II. ANALYSIS
  VALIC appeals the judgment entered after a bench trial.
We review the district court’s findings of fact for clear
error and review legal conclusions de novo. Trustmark Ins.
Co. v. General & Cologne Life Re of America, 424 F.3d 542,
551 (7th Cir. 2005). A federal court sitting in diversity
applies the substantive law of the state in which the
district resides. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78
(1938). When the highest court in the state has spoken on
a question of law, we apply that rule. Reiser v. Residential
Funding Corp., 380 F.3d 1027, 1029 (7th Cir. 2005). When
the highest court has not spoken, we attempt to predict
how the highest court would hold. Id.
   We have three questions before us on the appeal. First,
whether the prepayment clause is enforceable under
Illinois law. Second, if the clause is enforceable, whether
the amount refunded by VALIC was the correct amount.
Third, again only if the clause is enforceable, whether
River East or McLean owes costs and fees to VALIC.

  A. Enforceability of the Prepayment Fee
  Yield maintenance prepayment clauses are nothing
new. See Dale A. Whitman, Mortgage Prepayment Clauses:
A Legal and Economic Analysis, 40 UCLA L. REV. 851, 871
(1993). The idea behind a yield maintenance clause is to
protect a lender during times when interest rates are
falling. “Yield maintenance formulas are calculated to
cover the lender’s reinvestment loss when prepaid loans
bear above-market rates.” George Lefcoe, Yield Mainte-
nance and Defeasance: Two Distinct Paths to Commercial
Mortgage Prepayment, 28 REAL EST. L.J. 202, 202 (2000).
A lender who makes a long-term loan expecting a particu-
lar rate of interest runs the risk that prepayment during
a period of lower interest rates will reduce its income.
6                                               No. 06-3856

VALIC argues that some lenders, itself included, need to
be able to rely on predictable payments in order to live
up to their other financial and regulatory obligations.
When the loans in question are measured in eight digit
figures, as in this case, the lost interest income can be
substantial.
  One method that lenders might use to guard against this
risk is to refuse to allow borrowers to prepay the loan. See
RESTATEMENT (THIRD) PROP. (MORTGAGES) § 6.2 (1997) (“an
agreement that prohibits payment of the mortgage obliga-
tion prior to maturity is enforceable”). Or lenders might
charge a fixed fee, a percentage of the loan balance, or
a declining percentage of the loan balance. Whitman, 40
UCLA L. REV. at 871. However, assuming that the bor-
rower would like the privilege of prepaying the loan
instead of being locked in for its entire term, fees based
on fixed numbers or the loan balance do not take into
account long-term fluctuations in interest rates. Hence the
development of yield maintenance clauses: formulas that
attempt to account for the expected interest, the outstand-
ing principal, and fluctuations in prevailing interest rates.
  We should note at the outset that the parties are unable
to agree on the legal standard that Illinois courts would
apply to this question. River East maintains that Illinois
would analyze the prepayment fee under a liquidated
damages analysis. Appellee’s Br. at 17-31. VALIC argues
that Illinois would consider the clause to be a bargained-
for form of alternative performance. Appellant’s Br. at 16-
19. The district court applied Illinois’s liquidated damages
analysis but did not cite any Illinois cases to support that
decision. River East Plaza, L.L.C. v. Variable Annuity Life
Co., No. 03 C 4354, 2006 WL 2787483 at *8-9 (N.D.Ill. Sep.
22, 2006).
 The parties can point us to no case from the Illinois
Supreme Court that establishes a rule of law for the
No. 06-3856                                                 7

enforceability of prepayment fees in commercial real estate
loans, and we are unable to find one. Illinois has placed
statutory limitations on the ability of lenders to charge
prepayment fees, but those provisions apply only to certain
residential mortgages. See 815 ILL. COMP. STAT. 205/4.
River East argues that “the Illinois Supreme Court has
adopted the Restatement of Contract’s prohibition against
penalty clauses.” Appellee’s Br. at 19 (citing Bauer v.
Sawyer, 134 N.E.2d 329, 333 (1956)). VALIC appears not
to take issue with this statement of the law. But we should
note that Bauer was not a case concerning mortgage
prepayment, and it specifically cited to Section 356(1) of
the Restatement, which stands more precisely for the
proposition that some liquidated damages clauses are void
as against public policy because they are penalties.
RESTATEMENT (SECOND) OF CONTRACTS § 356(1) (“A term
fixing unreasonably large liquidated damages is unenforce-
able on grounds of public policy as a penalty.”). The
comments to the Restatement clarify: “Punishment of a
promisor for having broken his promise has no justification
on either economic or other grounds and a term providing
such a penalty is unenforceable on grounds of public
policy.” REST. 2D CONTR. § 356(1) cmt. a.
  If we start from the position that Illinois will not enforce
penalty clauses, and that Illinois recognizes that some
liquidated damages clauses cross the line and become
penalty clauses in disguise, the underlying question is
whether this clause is punitive in nature. “[W]hen the sole
purpose of the clause is to secure performance of the
contract, the provision is an unenforceable penalty.”
Checkers Eight Ltd. P’ship v. Hawkins, 241 F.3d 558, 562
(7th Cir. 2001) (citing Am. Nat’l Bank & Trust Co. of Chi.
v. Reg’l Transp. Auth., 125 F.3d 420, 440 (7th Cir. 1997);
Med+Plus Neck & Back Pain Ctr., S.C. v. Noffsinger, 726
N.E.2d 687, 693 (Ill. App. Ct. 2000)). Penalties, or liqui-
dated damages clauses in general, are distinct from
8                                             No. 06-3856

alternative forms of performing the obligations under the
contract. See JOHN D. CALAMARI & JOSEPH M. PERILLO,
CONTRACTS § 14-34 (3d ed. 1997). In order to distinguish
between the two, “a court will look to the substance of the
agreement to determine whether . . . the parties have
attempted to disguise a provision for a penalty that is
unenforceable. . . . In determining whether a contract is
one for alternative performances, the relative value of the
alternatives may be decisive.” RESTATEMENT SECOND OF
CONTRACTS § 356 cmt c.
  Using the Restatement as a guide, we will first consider
the “relative value of the alternatives” to see if they are
decisive. All of the figures that follow (although rounded
for ease of reading) come from the stipulated facts dated
February 14, 2005 that the parties agreed on, and which
the district court adopted. River East borrowed $12.7
million from VALIC at 8.02% interest. If River East had
paid as scheduled over the course of twenty years, it would
have paid roughly $16.4 million in interest to VALIC
before the note matured in 2020. By July 2003, when River
East prepaid the loan subject to reservation of rights, the
outstanding principal remained over $12 million, and River
East had already paid roughly $3.45 million in interest. On
July 1, 2003, River East paid slightly more than $4.7
million in prepayment fees, but that sum was reduced to
approximately $3.9 million while this litigation was
pending when VALIC reimbursed the overcharge.
  Looking at the relative value of the alternatives, we are
not convinced that the parties used this clause to disguise
a penalty that is unenforceable. By electing an option to
pay early, River East avoided paying the $13 million in
remaining interest payments that would have been due
between 2003 and 2020, and instead paid only $3.9 million.
Even assuming, due to the time value of money, that the
$3.9 million was worth more in 2003 than it would have
been worth over the course of the loan, River East seems
No. 06-3856                                                 9

to have benefitted from this bargain. This hardly seems to
be a clause whose “sole purpose is to secure performance
of the contract.” Checkers Eight, 241 F.3d at 562. Note, for
example, that this prepaid interest is automatically
reduced by the operation of the discount rate in the
prepayment clause: River East was not obligated to pay
any of the forgone interest that VALIC could have earned
back by investing the returned principal in Treasuries.
   But what of the “relative value of the alternatives” to
VALIC? River East makes much of the fact that VALIC
was “overcompensated” by the prepayment clause. Appel-
lee’s Br. at 1, et seq. Of course, a value-laden term such as
“overcompensated” only begs the question of “compared to
what?” It certainly cannot be the case that VALIC was
overcompensated by receiving more from River East than
it contracted for. It contracted to receive $16.4 million over
twenty years. Loan amortization being what it is, that
income from interest would have been front-loaded into the
first half of the loan term. Instead, VALIC received $3.45
million over three years and an additional $3.9 million in
year four. River East also does not make the argument
that the prepayment overcompensated VALIC compared
to what the prepayment clause required. We recognize
that there is a second question at play here, regarding
whether VALIC’s agent properly calculated the payoff
amount, which was the subject of count two of the com-
plaint. More on that later. But whether VALIC’s agent
incorrectly calculated the figure in 2003 cannot be the
grounds for arguing that the clause was unenforceable as
written in December 1999.
  Instead, River East relies on a clever argument that
VALIC is overcompensated because VALIC can now, if it
so chooses, reinvest the returned principal and eventually
get an even greater income stream from somebody else
than it would have received from River East. This argu-
ment is worth considering in more detail. The prepayment
10                                              No. 06-3856

provision is termed “Treasury-flat.” This means that
VALIC’s 8.02% interest rate was discounted by the prevail-
ing rate on Treasuries as of the date that River East
elected to prepay. As we noted above, the unwritten
assumption in such a formula is that VALIC can take the
returned principal, invest it in Treasuries, and by taking
the income from the Treasuries and adding it to the
prepayment fee, VALIC gets the exact return it expected
from the loan. Reality, we might suspect, will be different.
One might believe, and expert testimony at trial supported
this belief, that interest rates on commercial real estate
loans will almost always exceed the interest rates on
Treasuries. This spread in interest rates gives VALIC a
chance to profit from the prepayment. The argument goes
that sophisticated lenders like VALIC will not invest the
returned principal in Treasuries, but will simply line up
a new commercial real estate loan. But there is an irony
to this argument. In trying to argue that the prepayment
clause is a penalty, which by definition is a clause whose
sole purpose is to secure the performance of the contract,
River East argues that VALIC would have been effectively
worse off if the contract had been repaid over the term of
the loan instead of prepaid.
  In short, viewing the contract in light of Illinois’s
reliance on the Restatement, we find nothing to suggest
that the clause is an unenforceable penalty. Under Illinois
law, the loan could have explicitly prohibited any prepay-
ment whatsoever. River East desired the option to prepay.
VALIC accommodated that desire and included a
Treasury-flat yield maintenance prepayment fee. River
East voluntarily prepaid, and by doing so River East
escaped paying $13 million in interest over seventeen
years by prepaying $3.8 million in 2003. VALIC received
its principal, and was free to either reinvest it in Treasur-
ies (in which case it would be no worse off), hold it as cash
(in which case its income would be less than bargained for
No. 06-3856                                               11

from River East), or invest it in additional real estate
mortgages with their attendant higher risks of default. The
relative value of the alternatives for both parties leads us
to believe that the clause is not punitive in nature.
  River East and the district court believe that Illinois
courts would apply the rubric of liquidated damages to
determine if the prepayment clause is unreasonable. As
River East notes in its brief, Illinois follows the Restate-
ment in holding that “[d]amages for breach by either
party may be liquidated in the agreement but only at an
amount that is reasonable in the light of the anticipated or
actual loss caused by the breach and the difficulties of
proof of loss.” RESTATEMENT SECOND OF CONTRACTS § 356;
see also Bauer, 134 N.E.2d at 333. Certainly under any
ordinary view of the contract’s unambiguous terms, the
prepayment is not a breach: the parties explicitly provided
that River East would be allowed to prepay. The fee for
prepaying seems a long stretch from damages for a breach
if both parties entered the contract believing that the
contract allowed River East to prepay.
  Nevertheless, it is conceivable that a state might use the
law of liquidated damages as some sort of analogy to
determine whether the prepayment clause is a penalty as
opposed to alternative performance. As we noted above, we
find nothing in decisions of Illinois courts to indicate that
this is the case in Illinois. The Illinois cases that the
parties have drawn to our attention are silent on the
question.
  The only case that uses the term is clearly off-topic. In
Goodyear Shoe Mach. Co. v. Selz, Schwab & Co., 51 Ill.
App. 390 (Ill. App. Ct. 1894), the court applied a liquidated
damages analysis to a prepayment discount for early
payment of amounts owed under a royalty agreement.
Holding that a fifty percent discount for paying a bill two
weeks early was only a device to disguise a late payment
12                                              No. 06-3856

fee of one hundred percent, the court examined the
reasonableness of a one hundred percent late payment fee
under a liquidated damages analysis. This seems awfully
flimsy precedent to support the argument that “prepay-
ment provisions are analyzed as liquidated damages
clauses.” Appellee’s Br. at 22.
  Even the law review article that River East cites to
support its argument contradicts River East’s position.
Appellee’s Br. at 20 (citing 40 UCLA L. REV. 851, 889-90).
In surveying the legal landscape of how state courts
confront prepayment clauses, Professor Whitman observes
that “state courts have ignored the law of liquidated
damages (perhaps appropriately) when faced with the
issue of the validity of prepayment fee clauses.” 40 UCLA
L. REV. at 889. Professor Whitman continues: “a
freely-bargained prepayment fee clause ought to be
enforced against the borrower who makes a voluntary
prepayment, irrespective of the amount of money that
the lender’s clause demands.” Id. at 890. After concluding
that such clauses likely are, in a theoretical sense, liquida-
tion of damages, Professor Whitman concludes that the
“confusing pastiche” of liquidated damages laws should
be ignored by courts, a result that is “consistent with
nearly all of the nonbankruptcy cases involving volun-
tary prepayments.” Id.
  Nevertheless, the district court relied on a federal case,
Automotive Fin. Corp. v. Ridge Chrysler Plymouth, LLC,
219 F. Supp. 2d 945 (N.D. Ill. 2002), for the proposition
that Illinois would have considered the case under a
liquidated damages framework. Automotive Finance makes
no such conclusion. The court in Automotive Finance
emphasized, as we did above, that the real question is
whether the clause is a penalty intended to secure perfor-
mance. Id. at 949 (“[T]he real question is not whether [the
clause] sets out damages for a breach, but rather whether
that paragraph calls for payment of an unenforceable
No. 06-3856                                              13

penalty.”). The court was careful to note that it was
invoking a “comparison” to the law of liquidated damages,
and called cases comparing liquidated damages to penal-
ties “an apt analogy.” Id. at 949-50.
  The court in Automotive Finance cited to this court’s
precedent of In re LHD Realty Corp., 726 F.2d 327, 330
(7th Cir. 1984). We should observe that LHD Realty
seems particularly off-topic here for three reasons: it
was a bankruptcy case, the lender accelerated the note
instead of the borrower voluntarily prepaying, and the
court never purported to be relying on Illinois law. Id. But
even if an Indiana bankruptcy case should be found
persuasive for an Illinois voluntary prepayment, we
observe that our holding in In re LHD Realty that “reason-
able prepayment penalties are enforceable” was modified
by the district court in Automotive Finance to read “only
reasonable prepayment penalties are enforceable.” 219
F. Supp. 2d at 949 (citing In re LHD Realty, 726 F.2d at
330) (emphasis added).
  River East considers the clause unreasonable because
the lender will almost always be able to re-lend the
principal at a rate higher than the Treasury rate, because
commercial real estate loans frequently carry a rate
higher than the treasury rate. River East notes that
many players in the industry have adjusted their prepay-
ment clauses to account for some of that cushion between
the Treasury rate and the loan’s rate by adding twenty-
five or more basis points to the discount rate. But this
only shows that lenders and borrowers are involved in a
market where the relative risk of “breach” (if we were to
make an analogy to damages) is weighed against the
potential fluctuations of interest rates, regulatory pres-
sures faced by insurers like VALIC, long-term risk of
depressed real estate markets, availability of suitable
replacement property owners, and any of a myriad other
factors. But even the lenders who are most generous, by
14                                              No. 06-3856

adding twenty-five or fifty basis points to the Treasuries,
would have made an “unreasonable” fee according to River
East’s argument because the fee would allow them to
recover more from their future investments than they
would have from the original borrower.
   River East includes a make-weight argument that the
parties never intended to agree to the clause. This claim
should never have been allowed to proceed to trial. “The
intention of the parties to contract must be determined
from the instrument itself, and construction of the instru-
ment where no ambiguity exists is a matter of law.” Farm
Credit Bank of St. Louis v. Whitlock, 581 N.E.2d 664, 667
(Ill. 1991). Even if the parol evidence were allowed and
credited, it falls far short of establishing that the parties
did not intend to be bound by the prepayment clause. An
opinion letter from a party’s lawyer, which itself “ex-
presses no opinion” on the enforceability of a term, is a
poor excuse for evidence that the party did not intend to
be bound. This is particularly true in light of the fact
that the parties went forward with the closing despite
the opinion letter. The fact that a party would have
preferred a different term does not make a clause in the
contract unilaterally voidable at a later date.
  In short, we hold that VALIC is entitled to judgment as
a matter of law on River East’s first count of the com-
plaint. We are convinced that a contrary result would have
broad implications for both lenders and borrowers of
mortgage-secured loans in Illinois, and might inadver-
tently effect a wide-ranging alteration of the law of real
estate financing in Illinois. “The responsibility for making
innovations in the common law of Illinois rests with the
courts of Illinois, and not with the federal courts in Illi-
nois.” Lake River Corp. v. Carborundum Co., 769 F.2d
1284, 1289 (7th Cir. 1985). Accordingly, we must reverse
the judgment of the district court with respect to count
one of River East’s complaint.
No. 06-3856                                              15

  B. The Overcharge Dispute
   When River East gave final notice that it intended to
prepay the loan, VALIC’s agent prepared a payoff state-
ment that included the prepayment fee. Unfortunately,
that agent miscalculated the fee by nearly one million
dollars. This fact did not come to light until discovery, at
which point River East amended its complaint to add a
second count for breach of contract for the overcharge. The
parties are unable to agree on the exact date that River
East gave notice. It turns out that this question of fact
carries a price tag of nearly $1600. The parties stipulated
that if River East gave notice on April 21, then VALIC
overcharged by $828,514.00, but if River East gave notice
on April 22, then VALIC only overcharged by $826,922.27.
VALIC returned $826,922.27 plus interest while this
litigation was pending.
  The district court held that River East’s second count
was moot because VALIC was required to repay the entire
prepayment fee. Having found above that VALIC was
entitled to keep the prepayment fee, the question is
relevant again. This factual dispute was submitted to the
district court for determination at trial. The district
court appears to have made a finding of fact that the no-
tice was received on April 21. River East Plaza, L.L.C. v.
Variable Annuity Life Co., No. 03 C 4354, 2006 WL
2787483, at *13 (N.D. Ill. Sep. 22, 2006) (“Based on the
facsimile produced at trial, River East provided notice of
its intent to prepay the Loan on April 21, 2003.”).
  But the math is perplexing. If River East originally paid
$4,713,601.27, and VALIC returned $826,922.27, then
River East had paid a total of $3,886,679.00. The district
court had awarded VALIC an alternate prepayment fee of
$123,012.15. Subtracting the alternate fee of $123,012.15
from the amount paid of $3,886,679.00 would leave
$3,763,666.85 to be refunded to River East. But the district
16                                             No. 06-3856

court concluded that River East was entitled to a refund of
$3,762,666.85. We are unsure of where that extra thousand
dollars went. Perhaps we misread the district court’s
findings of fact regarding the date of notice, or perhaps we
misread the district court’s math. But if, as we suspect,
the district court has found that notice was received on
April 21, the exact amount of River East’s refund should
be clarified on the remand.

  C. VALIC’s Counter-Claims and Third-Party Claim
  The loan documents provided that if River East sued
VALIC under the note and did not prevail, then River East
would owe VALIC costs and fees, to include attorney’s fees.
VALIC’s cross-claim against River East, and third party
complaint against McLean as the guarantor of River
East’s obligations, was based on those terms. The district
court denied VALIC’s claim because River East did prevail.
Of course, the legal landscape has now changed. River
East has not prevailed on its first count, but as we noted
above we are uncertain whether River East did or should
prevail on the second count. The district court is entitled
to make that determination in the first instance, and it
will be among the issues considered on remand.

                    III. CONCLUSION
  For the reasons set forth above, the judgment of the
district court is REVERSED and the case is REMANDED with
instructions to enter judgment in favor of the appellant on
count one of the complaint, and for further proceedings
consistent with this opinion.
No. 06-3856                                        17

A true Copy:
      Teste:

                   ________________________________
                   Clerk of the United States Court of
                     Appeals for the Seventh Circuit

               USCA-02-C-0072—8-22-07