Daily Development for Monday, September 15, 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

LENDER LIABILITY; STATUTE OF FRAUDS: Michigan statute prohibiting any "action" based upon an agreement to waive a loan provision bars even claims based upon promissory estoppel or other equitable bases.

Crown Technology Park v. D&N Bank, 200 WL 1342704 (9/15/00)

Borrower had an existing mortgage loan with lender that provided that there could be no prepayment of the loan and that if acceleration occurred "for any reason," the borrower would pay the lender the balance of the interest payable on the loan until the end of the term. (The court commented that no one asked if this language was enforceable the penalty upon acceleration raises a doubt.)

Borrower was aware that, since its old tenant had vacated the building, lender viewed this loan as something of a problem loan and probably would like to escape it. Borrower was negotiating a lease with a new tenant that required that borrower make a substantial new investment in the building. It asked lender if it was interested in rewriting the loan to increase the principle and extend the term at a fixed rate, and lender declined.

Borrower's counsel indicated to lender's loan officer that borrower had alternate financing sources that would give it the loan it needed, and inquired whether "there was going to be any problem" in paying off the existing mortgage." The officer replied, in substance, that he had checked on the loan and that there was no prepayment penalty. Borrower's counsel claimed that this led him to believe that lender would not enforce it's "no prepayment" clause in the mortgage, and thus proceeded to execute the lease with the new tenant and arrange for the refinancing and construction loan from another lender.

When the payoff closing was set up, borrower's counsel learned, the for first time, that lender indeed did intend to exact a prepayment fee. It did demand a fee of $66,378, which was probably one year's interest on the note. Borrower paid the fee under protest, since it needed to close on its other loan, and sued to recover the fee. The trial court found for plaintiff Borrower, which is the reason that, on appeal, we can assume that borrower's allegations concerning lender's representations were correct. Notwithstanding this, the appeals court reversed, holding that a 1993 Michigan amendment to the Statute of Frauds protected lenders from claims based upon arrangements that were not entered into in the formal manner required by that statute.

MCL Section 566.132 provides that "an action may not be brought against a financial institution to enforce [loan commitments, loan modifications, loan term waivers, or other similar understandings] unless the prmoise or commitment is in writing and signed with an authorized signature by the financial institution."

Prior Michigan authority had recognized that claims based upon promissory estoppel and other equitable claims constitute an exception to the Statute of Frauds. The court of appeals here indicated some hostility to that authority (fn. 5) but concluded that it was not necessary to challenge that authority because in this case it was necessary only to hold that the Michigan legislature, in enacting this special protection for lending institutions, had necessarily concluded that even equitable claims based upon oral representations would be barred.

The appellate court also rejected the negligence claim asserted by the mortgagor and its counsel, finding that this claim was intimately related to the promissory estoppel claim and merely constituted a variation of that claim (i.e., an action to enforce an oral promise).

Reporter's Comment: The following (copywrited) comment is by Jack Murray, First American Title Insurance guru and noted commentator on mortgage issues, who tipped the editor to this case:

In response to the surge in lender liability claims against lenders commencing in the mid1980s (especially in connection with affirmative claims or defenses of borrowers based on breach of an alleged oral agreement to lend, to extend, modify or refinance an existing loan, or to forbear from exercising contractual remedies), many states enacted laws specifically requiring a written agreement between the lender and borrower as a prerequisite for any legal action against the lender.

These statutes typically apply to any ``credit agreement,'' which the Illinois Credit Agreement Act defines (as an example) as ``an agreement or commitment by a creditor to lend money or extend credit or delay or forbear repayment of money.'' Some state credit agreement statutes go even further by including within their scope agreements covering any other financial accommodation, while other state statutes apply only to a loan of money or the loan of money and an extension of credit. Michigan's statute, as quoted in Crown Technology Park, supra, applies to "(a) A promise or commitment to lend money, grant or extend credit, or make any other financial accommodation. (b) A promise or commitment to renew, extend, modify, or permit a delay in repayment or performance of a loan, extension of credit, or other financial accommodation. (c) A promise or commitment to waive a provision of a loan, extension of credit, or other financial accommodation." M.C.L. § 566.132, as amended by 1992 PA 245, effective January 1993. Minnesota was the first state to enact a credit agreement statute, in 1985, and at least 36 other states have since enacted similar laws. As one commentator has stated, these statutes were ``intended to prevent misunderstandings between parties to credit agreements and to introduce certainty into what is too often an informal process.''

However, there is no ``uniform'' credit agreement statute, and the provisions of these laws vary from state to state. These statutes either expressly incorporate and include credit and loan agreements within the respective existing statutes of frauds of the state, or else they contain separate provisions requiring those agreements to be in writing. Some credit agreement statutes provide further protection to the lender by expressly prohibiting the use by borrowers of alternative theories of recovery, including actions based on torts such as breach of fiduciary duty, fraud, and misrepresentation (which actions would normally constitute exceptions to statutes of fraud), if those other theories would require proof of the same facts necessary to prove the oral agreement. Other state statutes (and courts interpreting such statutes) are more solicitous of the borrower's interests, particularly for noncommercial transactions. For example, Nebraska's credit agreement statute requires the lender to give express notice to the borrower of the existence of the statute, either by bold writing on the note or by a separate signed writing; Arizona's credit agreement statute only applies if the amount involved equals or exceeds $250,000; and Delaware's and Illinois' statutes exempt transactions for personal, family, or household purposes.

In those states having statutes that do not expressly prohibit the borrower from raising traditional equitable defenses, courts interpreting those statutes have not been uniform in their decisions on whether defenses such as equitable estoppel, waiver, partial performance, or bad faith, which have traditionally constituted valid defenses to state statutes of frauds, are still available to borrowers. A court in Florida has held that the state's credit agreement statute only prohibits a borrower from maintaining an action on an oral credit agreement and does not necessarily bar equitable defenses in an action by the lender, while an Illinois court has held, similar to the Michigan appellate court's holding in Crown Technology Park, that equitable defenses are unavailable to a borrower under the state's credit agreement statute because, although such defenses constitute an exception to the statute of frauds, the Illinois legislature, by enacting an entirely separate credit agreement statute rather than amending the existing statute of frauds, intended for the credit agreement statute to extend beyond the statute of frauds and the traditional defenses to that statute.

The American Bar Association ("ABA") drafted proposed legislation several years ago "in response to the dramatic increase in 'lender liability' in the 1980s." The ABA formulated a proposed uniform or ``model'' credit agreement statute, which contains a provision that specifically precludes an action or defense by the borrower based on traditional equitable theories because, as one of the drafters of the model statute has noted, ``[w]ithout such a provision, experience tells us that borrowers will seek such relief, and that courts may sometimes afford such relief.'' The ABA model provision provides, in pertinent part:

``Failure to comply with Section 1 shall preclude an action or defense based on any of the following legal or equitable theories: (a) an implied agreement based on course of dealing or performance or on a fiduciary relationship; (b)promissory or equitable estoppel; (c) part performance, except to the extent that part performance may be explained only by reference to the alleged promise, undertaking, accepted offer, commitment or agreement; or (d) negligent misrepresentation.''

Editor's Comment 1: Note that, contrary to the ABA proposed language, the Michigan statute bars only "actions" and does not mention equitable "defenses." Presumably this difference has some meaning, although further Michigan developments will answer the question. If the balance of the Michigan bench is as hostile to equitable defenses to the Statute of Frauds as this panel appeals to be, one might expect that equitable defenses also will be viewed as barred by the statute.

Editor's Comment 2: As the court points out, the borrower's counsel was fully aware of prepayment restrictions in the note and the statements from the loan officer were equivocal, at best, on the issue of waiver, so the editor might have agreed with the outcome in this case. But the editor is concerned that this broad reading of the statute might well give rise to some horrific cases of lender abuse of borrowers in the future. Lenders frequently are willing to cooperate on prepayment penalties when they can relend the money, and it would not be unusual for a loan officer to have authority to waive a prepayment restriction. In this case, the lender had sold 90% of the loan to an insurance company, which undoubtedly complicated matters. It is not clear that the borrower knew of this.

Should this statute be a bar to actions based upon misrepresentation or outright fraud? The court is careful to point out that these allegations were not made here, but its sweeping language of the legislative intent might take us that far. In the editor's view, that would be too, too far.

Editor's Comment 3: In the negligence claim, the borrower claimed that the lender had a duty to make the loan terms clear to the borrower. A concurring opinion argued that even if this claim was not barred fully by the statute, there is no evidence that this duty existed in a case in which the borrower knew and could understand the written terms of the loan agreement.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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