Decisions in 1995 and 1996 by Illinois state and federal courts established that if any portion of an agreement is a commercial loan or credit agreement, then the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq., bars all claims, counterclaims, and defenses by the debtor against the lender based either on their agreement, or on any credit agreement amendment or modification, that is not both written and signed. Klem v. First National Bank of Chicago, 275 Ill. App. 3d 64 (1995); First National Bank in Staunton v. McBride Chevrolet, Inc., 267 Ill. App. 3d 367 (1994); McAloon v. Northwest Bancorp, Inc., 274 Ill. App. 3d 758 (1995); Whirlpool Financial Corp. v. Sevaux, 96 F.3d 216 (7th Cir. 1996). These cases permitted commercial lenders to reduce their risk of lender liability claims by including in their credit agreements choice of law and venue provisions that provide for the application of Illinois law and for resolution of disputes by Illinois courts. See, e.g., “The Best Defense Against Lender Liability Claims” (The Secured Lender, May/June 1998).

Since 1996, Illinois state and federal courts have interpreted the Act to provide commercial lenders with even broader protection. Commercial lenders now have even more to gain by having their credit agreements choose Illinois law to govern the agreements and Illinois courts to resolve related disputes.

The Act bars claims and defenses relating to a guaranty that is “an integral part” of a credit agreement. In Bank One, Springfield v. Roscetti, 309 Ill. App. 3d 1048, 1058-1059 (1999), the Illinois Appellate Court held that the Act barred claims and defenses based on oral promises to modify a guaranty that was “an integral part” of a credit agreement. Several Illinois federal district court decisions similarly have held that the Act applies to claims and defenses and based on oral representations relating to a guaranty. Westinghouse Electric Corp. v. McLean, 938 F. Supp. 487 (N.D. Ill. 1996); Finova Capital Corp. v. Slyman, 2002 WL 318294 at *3-*5 (N.D. Ill. Feb. 25, 2002); Household Commercial Financial Services Inc. v. Suddarth, 2002 WL 31017608 at *4-*6 (N.D. Ill. Sept. 9, 2002); LaSalle Business Credit, Inc. v. Lapides, 2003 WL 722237 at *15 (N.D. Ill. March 3, 2003); and Daimlerchrysler Services North America, LLC v. North Chicago Marketing, Inc., 2004 WL 741740 (N.D. Ill. April 6, 2004).

The Act bars claims and defenses relating to an agreement, other than a credit agreement or a guaranty, if the agreement is “an integral part” of a credit agreement. Based on similar reasoning, the Illinois Appellate Court has held that the Act also bars claims and defenses relating to an agreement, other than a credit agreement or a guaranty, if the agreement is “an integral part” of a credit agreement. In Nordstrom v. Wauconda National Bank, 282 Ill. App. 3d 142 144-146 (1996), the Illinois Appellate Court held that the Act barred a claim based on an oral agreement to modify an agreement to obtain insurance for collateral, because the agreement to obtain insurance for the collateral was “an “an integral part” of a credit agreement. In R and B Kapital Development, LLC v. North Shore Community Bank and Trust Co., 358 Ill. App. 3d 912, 914-919 (1st Dist. 2005), the Illinois Appellate Court similarly held that the Act barred claims based on oral representations relating to an escrow agreement that was “an integral part” of a credit agreement.

The Act bars claims against lenders by persons other than debtors or guarantors if the claims are based on an obligation that depends upon an agreement that is “an integral part” of a credit agreement. In Engel Machinery, Inc. v. Wells Fargo Equipment Finance, Inc., 2004 WL 2973824 (N.D. Ill. Nov. 30, 2004), a machine vendor and a lender entered into a “holdback agreement” that required the lender to pay the vendor when the lease between the lender and the machine purchaser commenced. The machine vendor claimed that the lender breached the holdback agreement by not paying the vendor. The lender, however, never signed the lease. An Illinois federal district court held that the Act barred the vendor’s claims based on the holdback agreement, because the lender’s obligations under the holdback agreement depended upon the effectiveness of the lease, the lease was “an integral part” of the credit agreement between the lender and the purchaser, and the Act rendered the lease ineffective because it was not signed by the lender.

The Act bars claims based on a lease or sales agreement if the agreement functions at least in part as a credit agreement. In Haney v. Illinois Development Finance Authority, 53 Ill. Ct. Cl. 171, 1998 WL 34303190 at *2-*3 (Oct. 21, 1998), the Illinois Court of Claims held that the Act barred a claim based on an unsigned document that was titled and was in the form of a lease, but which had as a purpose and function the lending of money or extension of credit. In Health At Home, Inc. v. Medical Capital, L.L.C., 260 F.3d 748, 754 (7th Cir. 2001), the federal appeals court held that a sales and servicing agreement that provided for the sale of receivables along with a maintenance fee, an annual facility fee, and a monthly fee based on an interest rate applied to the sum of the receivables sold constituted a credit agreement and accordingly barred claims by the debtor/receivables vendor because the sales and servicing agreement was not signed by the lender.

The Act bars claims based on omissions from a credit agreement. In VR Holdings, Inc. v. LaSalle Business Credit, Inc., 2002 WL 356515 at *3-*4 (N.D. Ill. March 6, 2002), an Illinois federal district court held that the Act not only bars claims based on oral amendments to credit agreements, but also based on omissions from credit agreements.

The Act has no “full performance” exception. In Machinery Transports of Illinois v. Morton Community Bank, 293 Ill. App. 3d 207 (1997), the Illinois Appellate Court held that the Act barred claims based on an oral credit agreement, notwithstanding that the terms of the oral credit agreement already had been fully performed, thereby adding the “full performance” exception to the list of exceptions to traditional statutes of fraud that do not apply to the Act.

Now more than ever, commercial lenders should avail themselves of the protections of the Illinois Credit Agreements Act and reduce their risk of lender liability claims by including in their credit agreements choice of law and venue provisions that provide for the application of Illinois law and for resolution of disputes by Illinois courts. 

A version of this article appeared in the March 2009 issue of The Secured Lender Magazine.