Do “financial institutions” truly enjoy a higher level of protection against breach of contract claims of disgruntled borrowers under Michigan’s statute of frauds? In a victory for institutional lenders, the Michigan Court of Appeals, in its recent opinion in The Huntington National Bank v Daniel J. Aronoff Living Trust, et al., emphatically answered in the affirmative.
MCL 556.132 identifies the agreements, contracts, promises and commitments (not involving a conveyance of real estate) that must be in writing to be enforceable in Michigan. Subsection (1) of that statute, tracing its roots to 1846, is the traditional statute of frauds and does not limit who it benefits. Subsection (2), effective in 1993, was added in an attempt to protect institutional lenders against the wave of lender liability claims that developed in that era and by its terms benefits only a “financial institution.”
Aronoff revolved around a claim that Huntington Bank was contractually bound to make a $5 million loan. The trial court granted summary judgment to the bank based on the trial court’s conclusion that the various writings transmitted by the bank to the borrowers with respect to the proposed $5 million loan did not, either individually or collectively, satisfy the statute of frauds. The borrowers asked the trial court to reconsider its ruling, emphasizing their argument that the statute of frauds can be satisfied through “internal documents that were never shared with the other party”, and that further discovery of the bank’s internal records was therefore warranted. The trial court first observed that subsection (1) of MCL 556.132 can be satisfied by, among other things, a written “note or memorandum of the agreement, contract, or promise” while the language of subsection (2) does not contain the “note or memorandum” language but requires that the “promise or commitment” itself be in writing. After next observing that a promise is a manifestation of intent by the promisor that justifies reliance by the promisee, the trial court concluded that subsection (2) of MCL 556.132 (unlike subsection (1)) requires proof that the party seeking to enforce the promise or commitment actually received the writing signed by an authorized signer of the financial institution. On that basis, the trial court ruled that discovery into the internal records of the bank was a pointless exercise and denied the motion for reconsideration.
The Michigan Court of Appeals affirmed. Emphasizing subsection (2)’s lack of the words “note or memorandum of the agreement, contract, or promise” as found in subsection (1), the Court of Appeals first held that “[i]t is not, therefore, sufficient to show that the financial institution memorialized a portion of the agreement or reduced a preliminary understanding to writing and then later orally agreed to proceed under that framework, nor is it sufficient to present a series of documents – some signed and others not signed – that together purport to be the agreement; rather, the proponent must present evidence that the financial institution actually agreed to the essential terms of the promise or commitment and each of those essential terms must be accompanied by the required signature.” (emphasis added)
Perhaps more importantly from the perspective of institutional lenders and borrowers’ predictable efforts to discover internal bank records, the Court of Appeals echoed the trial court and held that “[a] purely internal document cannot satisfy the requirements stated under MCL 556.132(2), because such a document could not induce reliance.” While not dispositive with respect to tort claims by a borrower against a financial institution, this holding can only help a financial institution’s efforts to avoid discovery fishing expeditions into the lender’s internal records.
Finally, the Court of Appeals made clear that subsection (2) of MCL 556.132 is available to a financial institution regardless of whether the borrower’s breach of contract claim is pled as a defense or as an affirmative cause of action.
For financial institutions involved in credit transactions in Michigan, the Court of Appeals opinion in Aronoff is a welcome advance.