Long before eMortgages, electronic signatures, and mobile apps hit the secured lending scene, Lord Nottingham proposed that the English Parliament pass An Act for Prevention of Frauds and Perjuries in 1677 to prevent nonexistent agreements from being “proved” through false testimony. That statute and its progeny remain an important resource in today’s financial services industry. All states have adopted a version of the statute of frauds and many states have enacted statutes of frauds specifically designed to provide broad protection for financial institutions. If used effectively, these “super” statutes of frauds can quickly dispose of claims and defenses related to credit agreements, allowing lenders to recover collateral, enforce notes and guarantees, and reduce the expense of litigation. These statutes should be one of the first tools lenders reach for when defending claims for breach of an unsigned credit agreement or prosecuting loan enforcement actions where claims and defenses related to credit agreements are asserted.

FinTech has expanded rapidly in recent years, but the longstanding principle that certain contracts are unenforceable unless reduced to a signed writing remains true. In fact, legislatures have drafted and courts have applied these “super” statutes of frauds (also known as credit agreement acts) broadly, which makes them very effective in addressing all sorts of claims and defenses—legal and equitable—related to credit agreements.

The Issue

Borrowers, guarantors, and loan applicants often assert claims or defenses based on alleged promises related to the extension of credit. A guarantor attempts to wiggle out of a commercial guaranty obligation based on representations made to him prior to signing. A loan applicant seeks to bind a lender to unsigned commitment letter. “They told me different terms applied” or “so-and-so promised a loan modification” the arguments go. These types of claims or defenses may be disposed of quickly with a statute for frauds for financial institutions. Even equitable claims and defenses (such as fraud, estoppel, waiver, partial performance, or bad faith), which traditionally have been recognized as exceptions to the statute of frauds and are often asserted in an effort to circumvent it, can be dealt a death blow by the super statutes of frauds regarding credit agreements.

Here are three brief examples:

Michigan: Super Statute of Frauds Bars Promissory Estoppel Claim

In 1992, the Michigan legislature passed an amendment to Michigan’s statue of frauds barring claims by borrowers against financial institutions based on oral agreements. In 2000, in Crown Tech. Park v. D&N Bank, F.S.B., 242 Mich. App. 538 (2000), the Michigan Court of Appeals held that promissory estoppel, one of the traditionally recognized equitable exceptions to the statute of frauds, did not apply to Michigan’s statue of frauds for financial institutions, noting that under the statute “a party is precluded from bringing a claim—no matter its label—against a financial institution to enforce the terms of an oral promise to waive a loan provision.” Id. at 550. The court noted that the Michigan legislature used the “broadest possible language” in the statute, which evidenced an intent of an “unqualified and broad ban” even of equitable claims against lenders to enforce oral loan modifications. Id. This statute should be top of mind for lenders in Michigan facing allegations regarding oral promises or unsigned writings regarding the extension credit.

Illinois: Guarantor’s Fraudulent Inducement Defense Rejected

Similarly, Illinois courts have determined that the broad language of the Illinois Credit Agreements Act (815 ILCS 160/0.01 et seq.) was intended to extend beyond the existing Frauds Act (740 ILCS 80/1 et seq.) because “by creating a new statute rather than amending the Frauds Act to include credit agreements, [the Illinois] legislature intended that the Act bar the traditional exceptions to the application of the statute of frauds.” RREF II BHB-IL MPP, LLC v. Edrei, 2016 IL App (1st) 151793-U, ¶ 31. The Illinois Credit Agreements Act imposes a “stringent version of the Statute of Frauds.” Whirlpool Fin. Corp. v. Sevaux, 874 F. Supp. 181, 185 (N.D. Ill. 1994), aff’d, 96 F.3d 216 (7th Cir. 1996); see also Resolution Trust Corp. v. Thompson, 989 F.2d 942, 944 (7th Cir. 1993) (“The statute is evidently designed to impose a strong form of the Statute of Frauds . . . on business loans made by financial institutions”). The Act is broadly construed—it bars all claims by a debtor based on, or related to, a credit agreement. See e.g., First Nat’l Bank in Staunton v. McBride Chevrolet, Inc., 267 Ill. App. 3d 367, 642 N.E.2d 138, 141-42 (4th Dist. 1994) (“[T]here is no limitation as to the type of actions by a debtor which are barred by the Act, so long as the action is in any way related to a credit agreement.”) (Emphasis added). See also R and B Kapital Dev., LLC v. N. Shore Cmty. Bank and Trust Co., 358 Ill. App. 3d 912, 916-19, 832 N.E.2d 246 (1st Dist. 2005) (finding plaintiff’s cause of action for negligent misrepresentation barred by the Illinois Credit Agreements Act because it was “based on oral statements related to a credit agreement.”)

In the Edrei case, an Illinois borrower and guarantor attempted to avoid foreclosure and sale of a commercial property by asserting claims and defenses of fraud, mistake, and violations of the Illinois Consumer Fraud Act. The guarantor of the commercial loan argued that the bank fraudulently induced him to execute guaranties “by falsely stating to [him] that the guaranties were ‘limited ‘bad boy’ guarant[ies]’ not full guaranties, i.e. a clause that the guarantors would only be responsible for nonpayment of the debt in the event the borrower engaged in certain ‘bad boy’ acts, such as waste, fraud, or intentional misappropriation of funds.” Edrei, supra at ¶ 6. Citing the Illinois Credit Agreements Act, the creditor successfully argued in the circuit court that those claims and defenses were barred. The Illinois Appellate Court affirmed the judgment enforcing the loan documents, noting that “the affirmative defenses and counterclaims raised by [the borrower and guarantor] fall squarely within the purview of section 160/2 of the [Illinois Credit Agreements Act] and thus the [Credit Agreements Act] bars those claims based on any alleged oral agreement.” Id. at ¶ 31.

As in Michigan, equitable claims and defenses in Illinois can be thwarted by this super statute’s expansive protection. It should be considered whenever borrowers or guarantors assert claims or defenses based on unsigned writings or oral promises.

Wisconsin

In a recent lawsuit filed by loan applicants in federal court (U.S. District Court for the Eastern District of Wisconsin, Case No. 17-cv-1109), the defendant bank cited Wisconsin’s statute of frauds for financial institutions to achieve dismissal of a complaint alleging a breach of a commitment to extend credit based on a letter sent to the plaintiffs. The loan applicants alleged that the lender breached a binding commitment to extend credit on terms stated in the letter. The court granted a motion to dismiss, agreeing with the bank’s argument that Wisconsin’s statute of frauds for financial institutions, Wis. Stat. § 241.02(3)(b), bars claims based on alleged contracts that are not “signed with an authorized signature by the financial institution.” The court reasoned that the commitment letter attached to the plaintiffs’ amended complaint was not signed and therefore the applicability of the statute of frauds was established on the pleadings.

Conclusion

Statutes of frauds for financial institutions provide broad protections against a variety of claims or defenses related to credit agreements and can be effective tools for lenders defending lawsuits or enforcing loan documents. Lord Nottingham would be pleased that his statute, 342 years after its adoption, still prevents what Benjamin Cardozo called the “peril of perjury and error [that] is latent in the spoken promise.”