Opinion ID: 1143085
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Heading: Credit Agreement Statutes

Text: Credit agreement statutes represent a legislative reaction to the recent surge in lender liability litigation. John L. Culhane, Jr. & Dean C. Gramlich, Lender Liability Limitation Amendments to State Statutes of Frauds, 45 Bus.Law. 1779 (1990). These statutes were enacted primarily to limit the most frequent lender liability claimsthose which involve assertions of breach of oral agreements to lend, to refinance or to forbear from enforcing contractual remedies by requiring a writing as a prerequisite for a debtor to sue a lender and thus precluding debtors from bringing claims based on oral agreements. Jeffrey A. Tochner, Note, Limiting Lender Liability in Florida: The Application of a Statute of Frauds to Credit Agreements, 44 Fla.L.Rev. 807, 809 (1992). The goal was to prevent bank customers from bringing baseless lender liability claims against banks alleging breaches of undocumented side agreements between the customer and one or more bank officers. David S. Willenzik, Future Advance Priority Rights of Louisiana Collateral Mortgages: Legislative Revisions, New Rules, and a Modern Alternative, 55 La.L.Rev. 1, 28 n. 116 (1994). Stated otherwise, these statutes were intended to prevent misunderstandings between parties to credit agreements and to introduce certainty into what is too often an informal process. Stephanie J. Shafer, Limiting Lender Liability Through the Statute of Frauds, 18 Colo.Law. 1725 (1989). Thus, the primary legislative purpose in enacting credit agreement statutes was to establish certainty as to the contractual liability of financial institutions. As one commentator remarked, the general goal behind these credit agreement statutes is to increase the certainty in contractual liability in order to reduce lender liability litigation. Todd C. Pearson, Note, Limiting Lender Liability: The Trend Toward Written Credit Agreement Statutes, 76 Minn.L.Rev. 295, 299-300 (1991). Similar to the D'Oench Duhme doctrine, these credit agreement statutes preclude the borrower's reliance on oral side agreements. See D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942). But unlike the D'Oench Duhme doctrine which operates to preclude a borrower's affirmative defenses to payment, credit agreement statutes operate to preclude a borrower's affirmative actions for damages based on oral side agreements. A majority of the states have enacted credit agreement statutes. Minnesota led the way by enacting a credit agreement statute in 1985. See Minn.Stat. § 513.33. The Minnesota statute defined a credit agreement as an agreement to lend or forbear repayment of money, goods, or things in action, to otherwise extend credit, or to make any other financial accommodation, and prohibited actions by a debtor on an oral credit agreement. The Minnesota courts have construed the term credit agreement broadly. See Becker v. First Am. Bank, 420 N.W.2d 239 (Minn. Ct.App.1988) (an alleged oral agreement to continue financing the borrower's business if the business sold some of its assets was an agreement to lend and therefore a credit agreement under the statute); Carlson v. Estes, 458 N.W.2d 123 (Minn.Ct.App.1990) (an alleged oral agreement to lower the interest rate on a loan was a promise to forbear repayment of money and was a credit agreement required to be in writing to be enforceable; however, an alleged oral agreement not to record a mortgage was not a credit agreement under the statute and did not need to be in writing to be enforceable); Rural Am. Bank v. Herickhoff, 485 N.W.2d 702 (Minn.1992) (an alleged oral agreement to apply farm crop proceeds to one loan before applying any of the proceeds to a second loan was a financial accommodation and therefore a credit agreement). There is no uniform credit agreement statute. While the various credit agreement statutes generally limit a lender's contractual liability, there are other provisions which vary from state to state. Some credit agreement statutes provide further protection to lenders by forbidding the use of alternative theories of recovery, such as breach of fiduciary or other duty, if the other theories would require proof of the same facts necessary to prove the oral agreement. Todd C. Pearson, Note, Limiting Lender Liability: The Trend Toward Written Credit Agreement Statutes, 76 Minn.L.Rev. 295, 305 n. 39 (1991). The model statute formulated by the American Bar Association contains a provision designed to foreclose end runs under certain theories. [4] This provision is apparently based on the theory that [w]ithout such a provision, experience tells us that borrowers will seek such relief, and that courts may sometimes afford such relief. John L. Culhane, Jr. & Dean C. Gramlich, Lender Liability Limitation Amendments to State Statutes of Frauds, 45 Bus.Law. 1779, 1797 (1990). On the other hand, some statutes express concern that lenders may take advantage of unsophisticated borrowers, particularly in non-commercial transactions. Perhaps the most significant of such provisions is one that requires the lender to give express notice of the statute to the borrower, either by bold writing on the note or by a separate signed writing. See, e.g., Neb.Rev.Stat. § 45-1, 113(2) (1990). Other such provisions include a dollar threshold for applicability of the statute, see, e.g., Ariz.Rev.Stat. § 44-101(9) (1991), or an exemption of transactions for personal, family or household purposes, see, e.g., Del.Code tit. 6, § 2714(b) (1990). As to equitable defenses such as equitable estoppel, waiver, partial performance or bad faith, one court has held that the credit agreement statute only bars a borrower from maintaining an action based on an oral credit agreement, and does not necessarily bar the defenses in a suit by the lender. See Brenowitz v. Central Nat'l Bank, 597 So.2d 340 (Fla.Ct.App.2d Dist.1992), interpreting the Florida statute which, like the Louisiana statute, was patterned after the Minnesota statute.