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Lum v. Bank of America

361 F.3d 217 (3rd Cir. 2004)

PRIME RATE; CREDIT CARDS—The term “prime rate” is sufficiently indefinite that it is reasonable for contracting parties to have different understandings as to its meaning, therefore advertising credit cards at the “prime rate” of interest does not rise to the level of fraud.

A customer borrowed money and received credit cards from various banks at “prime plus” interest rates. The borrower then sued, claiming that the banks, in setting “prime plus” interest rates, violated the Sherman Antitrust Act and the RICO act. The borrower alleged that the banks violated the Sherman Act by agreeing to misrepresent that the “prime rate” was the lowest rate available to their most credit-worthy borrowers, when in fact they offered some large borrowers financing at lower interest rates. He also alleged that banks violated RICO by making these misrepresentations through the mail and over interstate wires. The borrower further claimed that the fraudulently inflated “prime rate” resulted in his being charged a higher interest than permitted by the terms of the “prime plus” loan agreements. The lower court dismissed all claims because the borrower failed to plead the circumstances of the alleged fraud with particularity.

The Third Circuit affirmed the lower court’s holding because the borrower did not indicate the date, time or place of any misrepresentation, nor did he provide an alternative means of injecting precision and some measure of substantiation into the fraud allegations. Specifically, the buyer did not identify particular fraudulent financial transactions. Additionally, the Court held that the borrower could not allege that any of the purportedly fraudulent credit agreements defined the term “prime rate” as the lowest interest rate available to a bank’s most creditworthy borrowers. All the borrower did was to make general claims that the banks misrepresented that the prime rate was the lowest rate, however the borrower failed to indicate the date, time, or place of these alleged misrepresentations, or who made the statements to whom.

To counter these failures, the borrower argued that the term “prime rate” was widely understood to mean the lowest rate available to a borrower and that the bank’s failure to disclose that some borrowers obtain loans with interest rates below the prime rate constituted fraud. The Court disagreed, holding that the meaning of the term “prime rate” was sufficiently indefinite that it was reasonable for the parties to have different understandings as to its meaning. Accordingly, it was unreasonable to infer that the banks’ use of the term was calculated to deceive persons of ordinary prudence into believing that no borrower obtained an interest rate below the prime rate. For that reason, the Court concluded that using the term “prime rate” did not rise to the level of fraud.

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