River East Plaza, LLC v. Variable Annuity Life Insurance Co.

River East Plaza, LLC (River East) (plaintiff) was the developer of a property in Chicago. The property’s co-owner offered River East the chance to purchase the co-owner’s share of the project for $12 million. River East contracted with Variable Annuity Life Insurance Co. (Variable) (defendant) to loan River East the purchase money. Variable agreed to satisfy River East’s preferred closing date and gave River East its desired interest rate. In exchange, the parties agreed to a yield-maintenance prepayment clause that required River East to pay a fee if the loan was paid off early. The yield-maintenance prepayment fee was to be calculated by comparing the interest that would have been paid during the life of the loan with the amount of interest that could be made if the loan balance were invested at the interest rate of Treasury bonds at the time of prepayment. The clause protected Variable if interest rates declined before the prepayment, because in that case the amount of interest Variable expected to make on the loan would be maintained. Several years later, River East sold the property to a tenant and prepaid the loan. Although River East escaped paying $13 million in future interest by prepaying the loan, River East paid the prepayment fee under protest and sued Variable in Illinois state court. Variable removed the case to federal court, and the district court held that the prepayment fee was an unenforceable penalty clause. Variable appealed.