Introduction

In response to the surge in lender-liability claims against mortgage lenders commencing in the mid-1980s -- 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.”

For example, the Illinois Credit Agreements Act (“ICAA”), 815 ilcs 160/0.01 to 160/3.1, which took effect in September 1989, defines a credit agreement as “an agreement or commitment by a creditor to lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes, and not in connection with the issuance of credit cards, and states that “A debtor may not maintain an action on or in any way related to a credit agreement unless the credit agreement is in writing….” Some state credit-agreement statutes go even further than the ICAA 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.

Background

Minnesota was the first state to enact a credit-agreement statute, in 1985, and the vast majority of other states have since enacted similar laws. A list of these statutes (which the author believes is current through the date of this article) is attached as Exhibit A. These statutes were intended to prevent misunderstandings between parties to credit agreements and to introduce certainty into what was 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 existing statutes of frauds of the state, or else they are separate statutes requiring those agreements to be in writing.

Some credit-agreement statutes provide further protection to lenders by expressly prohibiting the use by borrowers of alternative theories of recovery, including defenses based on equitable defenses or torts such as breach of fiduciary duty, economic duress, promissory estoppel, bad faith, 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 an oral agreement.

Other state credit-agreement statutes (and courts interpreting such statutes) are more solicitous of the borrower's interests, particularly for non-commercial 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 applies only if the amount involved equals or exceeds $250,000; and Delaware's and Illinois' statutes (as well as many other states including Alaska, Arizona, and California) exempt transactions for personal, family, or household purposes.

Interestingly, in 1998 Kansas amended its credit-agreement statute to apply to suits brought by creditors as well as debtors. The Colorado Supreme Court, in Schoen v. Morris, 15 P.3d 1094, 1098 (Colo. 2000), held that the state’s statute of frauds barred enforcement of an oral credit agreement between two lenders. The court found the defendant, the party who committed to lend money to a borrower, to be a “creditor” and the plaintiff, a party who sought a credit agreement with the defendant, to be a “debtor.”

In those states with credit-agreement 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, as noted above, have traditionally constituted valid defenses to state statutes of fraud -- are still available to borrowers. Some courts hold that the state's credit-agreement statute may only prohibit a borrower from maintaining an action on an oral credit agreement and thus does not necessarily bar such equitable defenses.

But other states’ credit-agreement statutes are worded (or have been construed by courts) to provide that equitable defenses are unavailable to the borrower. The reasoning behind such an interpretation usually is that even though such equitable defenses may constitute an exception to the statute of frauds, by enacting an entirely separate credit-agreement statute rather than amending the existing statute of frauds, the state intended for its credit-agreement statute to extend beyond the statute of frauds and the traditional defenses to that statute. Often a court’s decision whether to permit equitable defenses in connection with the state’s credit-agreement statute depends on the particular facts of the case.

For example, numerous Illinois court decisions, both state and federal, have consistently held that traditional equitable defenses, whatever their nature, cannot be asserted against the lender in connection with a credit agreement if they are based on or related to an oral promise under the ICAA, even if the result may cause harsh consequences for the borrower in a particular case. Such defenses include a borrower’s allegation that, notwithstanding the language of the ICAA, it is entitled to assert a counterclaim or affirmative defense against the lender under the doctrine of “good faith and fair dealing” or “economic duress.”

But in a recent Illinois appellate-court case, BMO Harris Bank, N.A. v. Royalty Properties, LLC, 2016 Ill. App (1st) 151338-U (May 17, 2016), the court reversed the circuit court’s dismissal of the defenses of unclean hands and promissory estoppel, and held that “the [ICAA] does not bar economic duress claims based on the lender's alleged violation of its duties of good faith and fair dealing.” Id. at ¶ 25. The court stated that “economic duress serves as an affirmative defense even for commercial loans covered by the Credit Agreements Act.” Id. at ¶ 39. This appears to be the only Illinois case that expressly holds that the ICAA does not bar a claim of economic duress based on the allegation that the lender failed to exercise a duty of good faith and fair dealing (perhaps due to the harsh circumstances involved in this case, i.e., the borrowers alleged that the lender allowed them less than one day to review 50 documents, covering more than 500 pages, to complete a loan and they would lose a down payment of almost $2 million if they did not get the loan).

Conclusion

As noted in this article, courts generally broadly interpret credit-agreement statutes (unless otherwise provided in the applicable statute) to protect providers of commercial credit against claims by borrowers, when the claim is not supported by a document signed by all parties. It is clear that in Illinois and in states with similarly worded credit-agreement statutes that are not included within their statutes of frauds, a borrower generally is barred from asserting claims and defenses arising out of “or related to” an oral promise to extend credit. Every lender that engages in transactions that involve the extension of commercial credit in Illinois and in other states with credit-agreement statutes should be aware of and understand the provisions in such statutes, and determine whether or not such statutes (or case law interpreting such statutes) preserve all or some equitable defenses.

Credit-Agreement Statutes (including dollar thresholds)

Alabama: ala. code §8-9-2(7) ($25,000)                                                         

Alaska: alaska stat. §09.25.010(a)(13) ($50,000)

Arizona: ariz. rev. stat. § 44-101(9) ($250,000)

Arkansas: ark. code ann. §4-59-101 ($10,000)

California: cal. civ. code §1624(a)(7) ($100,000)

Colorado: colo. rev. stat. ann. §38-10-124 ($25,000)

Connecticut: conn. gen. stat. ann. §52-550(a)(6) (50,000)

Delaware: del. code ann. tit. 6, §2714(b) ($100,000)

Florida: fla. stat. ann. §687.0304

Georgia: ga. code ann. §§13-5-30(7) and 13-5-31

Hawaii: haw. rev. stat. §656-1(8) ($50,000)

Idaho: idaho code ann. §9-505(5) ($50,000)

Illinois: 815 ilcs  §§160/0.01 to 160/3.1  

Indiana: ind. code. ann. §§26-2-9-1 to -5

Iowa: iowa code ann. §535.17 ($20,000)

Kansas: kan. stat. ann. §§16-117 to -119

Kentucky: ky. rev. stat. ann. §371.010(9)

Louisiana: la. rev. stat. ann. §§6:1121 to -1124

Maine: me. rev. stat. ann. tit. 10, §1146 ($250,000)

Massachusetts: mass. gen. laws ch. 259, §1

Maryland: md. code ann. cts. & Jud. Proc. §5-408

Michigan: mich. comp. laws  ann. §566.132

Minnesota: minn. stat. laws ann. §513.33

Mississippi: miss. code ann. §§15-3-1, 15-1-73

Missouri: mo. ann. stat. §§432.045, 432.047

Montana: mont. code ann. § 31-1-116 ($100,000)

Nebraska: neb. rev. stat. §§ 45-1, 112 to 115 ($25,000)

Nevada: nev. rev. stat. §111.220(4) ($100,000)

New Jersey: n.j. stat. ann. §25:1-5(f), (g) ($100,000)

New Mexico: n.m. stat. ann. §58-6-5 ($25,000)

New York: n.y. gen. oblig. law §§5-701, 5-703(3)

North Carolina: n.c. gen.stat. §22-5 ($50,000)

North Dakota: n.d. cent. code §9-06-04(4) and (5) ($25,000)

Ohio: ohio rev. code ann. §1335.02 ($40,000)

Oklahoma: 15 okla. st. ann. §140 ($15,000)

Oregon: or. rev. stat.  §41.580(1)(h)

Rhode Island: r.i. gen. laws §9-1-4

South Carolina: s.c. code ann. §37-10-107 ($50,000)

South Dakota: s.d. codified laws §53-8-2(4)

Tennessee: tenn. code ann. §29-2-101(b)

Texas: tex. bus. & com. code ann. §26.02 ($50,000)

Utah: utah code ann. §25-5-4

Virginia: va. code ann. §11-2(9) ($25,000)

Washington: wa. st. 19.36.110

West Virginia: w.va.  code §55-1-1(g) ($50,000)