Daily Development for
Wednesday, November 1, 2000
By: Patrick A. Randolph,
Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu
STATUTE OF FRAUDS;
WAIVER: An alleged oral agreement to
modify a loan contract does not run afoul of the Statute of Frauds or a
provision in a loan document barring oral modification; although not supported
by consideration, it may become enforceable by operation of promissory
estoppel.
Rule Sales and Services,
Inc. v. U.S. Bank National Association, 991 P.2d 857 (Idaho App. 1999).
Borrower was unable to pay
off its loan at maturity and refinancing was complicated by the pending divorce
of borrower's principal and guarantor. Borrower, its guarantor and its
accountant met with the lender. The lender promised that the loan would not be
considered in default unless it was 30 days past due, and that it would give
borrower 10 days notice before it required the borrower's customers to pay the
lender indirectly according to its rights in the loan documents. The accountant
told the lender that he personally would pay off the debt rather than allow the
lender to make demand upon the customers.
Five days later the lender
notified borrower's customers. Subsequently, the borrower repaid the loan in
full and sued the lender for its $700,000 loss of business as a result of the
lender's notice. The lender defended on the basis that the oral promise (if
there was one) was barred by the Statute of Frauds and was unenforceable for
lack of consideration and was barred by a provision of the loan documents
requiring written modifications.
Analyzing the Idaho
Statute of Frauds, which requires writings for agreements to "grant or extend
credit," the court concluded that an agreement to lengthen the time of
performance after the loan was fully disbursed was not subject to the statute.
The lender unsuccessfully argued that an agreement to "extend" meant
to prolong the period of payment. Although the lender's promise was not
supported by consideration, the court found that it might be rescued by
promissory estoppel which requires a substantial loss to a promissee acting in
reasonable and foreseeable reliance upon the promissor's statement. The court
found those elements in this case because the borrower did not take advantage
of the accountant's promise to pay off the loan in order to prevent the
lender's contact with customers.
The court summarily
dismissed the contract provision requiring written modifications in keeping
with a number of cases that it cited to the effect that such a requirement can
be waived. Finally, the court ruled that under an Idaho statute allowing
attorneys' fees to the prevailing party in a commercial transaction, the
prevailing party in the remand was entitled to its attorneys' fees even though
the transaction (that is, the loan) was paid off.
Reporter's Comment:
Although the borrower was sympathetic and responsible (as evidenced by its full
payment of the loan) and the lender's conduct was inexplicable, the case turned
on the accountant's promise to lend money which, ironically, seems clearly
contrary to the Statute of Frauds as the court had just discussed. The court
got around the fact that the reliance was the borrower's decision not to borrow
money from the accountant, but it did not address the question whether the
accountant's promise could have been enforced if the need had arisen.
Editor's Comment 1: There
have been other decisions reported on DIRT indicating that a mortgage
instrument can be modified without new consideration. The consideration of the
original deal is deemed satisfactory. If that is the common law of Idaho, then
all the hullabaloo about estoppel would be moot.
The editor doesn't feel
that the question of the enforceability of the accountant's promise is all that
relevant in any event, since the reliance on the extension promise precluded
the borrower's further exploration of that option, which might have resulted in
an enforceable contract even if the verbal contract by the accountant did not.
Editor's Comment 2: Note
that a recent DD (for 9/25) reports a Michigan case that refused to enforce an
oral agreement of a bank officer, notwithstanding reliance and estoppel
arguments, because of a special statute of frauds applicable to bank officer's
promises.
Readers are urged to respond, comment, and argue with the daily
development or the editor's comments about it.
Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org
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DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors.
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