Indiana Commercial Foreclosure Law

ILLA Saves Bank From Alleged Misrepresentation That Loan Was “A Go”

In Classic Cheesecake Company v. JPMorgan Chase Bank, 546 F.3d 839 (7th Cir. 2008) (Classic.pdf) , the Seventh Circuit affirmed an Indiana District Court’s dismissal of a case brought against a bank that denied approval for a business loan.  The plaintiff claimed it had been damaged by the bank’s conduct.  The Court’s decision is favorable to lenders operating in Indiana and illustrates that, generally, the statute of frauds within the Indiana Lender Liability Act (“ILLA”), Ind. Code § 26-2-9, should carry the day in suits where purported borrowers claim to have been damaged by certain conduct of lenders.

Factual context.  Plaintiff Classic needed capital to grow, so it contacted the defendant bank to secure an SBA loan.  Although there were problems associated with getting the loan approved, a loan officer of the bank at one point told Classic that the loan was “a go.”  Despite further approval problems, the bank representative continued to make verbal assurances to Classic that the loan would be approved.  Ultimately, it was not.

The ILLA and the exception.  In a prior post I discussed the ILLA, which the Seventh Circuit in Classic Cheesecake correctly termed a “statute of frauds” requiring that agreements to lend money be in writing.  Since that did not occur in Classic Cheesecake, plaintiff Classic alleged that there was an oral agreement to loan money upon which Classic relied to its detriment.  (Classic also asserted claims for fraud and promissory estoppel.) 

Under Indiana law, there is a very narrow exception to the ILLA’s statute of frauds:  “an oral agreement that the statute of frauds would otherwise render unenforceable creates a binding contract if failing to enforce the agreement would produce an unjust and unconscionable injury and loss.”  The Classic Cheesecake opinion analyzed in detail the “unjust and unconscionable injury and loss” exception.

The key.  Classic sued the bank, claiming that it suffered financial losses surrounding the bank’s breach of the alleged oral promise to make the loan.  The ultimate issue in Classic Cheesecake was whether the bank’s conduct “could have been found to inflict an ‘unjust and unconscionable injury and loss’ and so trumped the bank’s defense based on the statute of frauds.”  For a thorough history and analysis of that nebulous phrase, please review the opinion, which is impressive.  The Court noted that Indiana’s definition of ‘unjust and unconscionable injury and loss’ is as follows:

In order to establish an estoppel to remove the case from the operation of the statute of frauds, the party must show that the other party’s refusal to carry out the terms of the agreement has resulted not merely in a denial of the rights which the agreement was intended to confer, but the infliction of an unjust and unconscionable injury and loss.

In other words, neither the benefit of the bargain itself, nor mere inconvenience, incidental expenses, etc. short of a reliance injury so substantial and independent as to constitute an unjust and unconscionable injury and loss are sufficient to remove the claim from the operation of the statute of frauds.

Examination of the exception.  The Court analyzed the particular facts alleged in the case and took a hard look at what the phrase “unjust and unconscionable injury and loss” really means.  The Court focused on a handful of things, including any unjust enrichment of the oral promissor (here, the bank); any heavy loss to the promissee (here, the alleged borrower); and the reasonableness of the reliance by the promissee on the alleged promise.  In the end, the Court felt that “the case turns out to be a routine promissory estoppel case, and that is not enough in Indiana to defeat a defense of statute of frauds.”  Here is part of the Court’s rationale:

For the plaintiffs to treat the bank loan as a certainty because they were told by the bank officer whom they were dealing with that it would be approved was unreasonable, especially if, as the plaintiffs’ damages claim presupposes, the need for the loan was urgent.  Rational businessmen know that there is many a slip ‘twixt cup and lips, that a loan is not approved until it is approved, that if a bank’s employee tells you your loan application will be approved that is not the same as telling you it has been approved, and that if one does not have a loan commitment in writing yet the need for the loan is urgent one had better be negotiating with other potential lenders at the same time.

Mixed result.  The ultimate outcome of Classic Cheesecake favored the bank, and the opinion provides good precedent for lenders going forward.  The statute of frauds in the ILLA is very difficult to overcome.  Basically, loans need to be reduced to writing and signed before their terms can be enforced.  Nevertheless, the bank did get sued and no doubt incurred substantial attorney’s fees in defending the case through an appeal to the Seventh Circuit in Chicago.  Commercial loan officers therefore should be very careful about providing false hope to borrowers. 

Is The Label “Indiana Lender Liability Act” A Misnomer?

In the past, I’ve heard things from secured lenders like:  “you don’t see any exposure to our bank under the Lender Liability Act, do you?” or “surely the borrower won’t countersue us under Indiana’s lender liability statute.”  People are sometimes surprised to learn that the so-called “Indiana Lender Liability Act” (“ILLA”), Ind. Code § 26-2-9, doesn’t list claims or causes of action that can be asserted against a lender.  The ILLA primarily deals with the issue of evidence, specifically the inadmissibility of oral testimony about the terms of a loan.  (Interestingly, the statute’s official title in the Indiana Code is “Credit Agreements.”)  The definitive ILLA case is Sees v. Bank One, 839 N.E.2d 154 (Ind. 2005) (Sees.pdf).  Somewhat amusingly, the Indiana Supreme Court itself struggled with the label: 

In the first reported opinion discussing the statute since its 2002 re-codification, the Court of Appeals refers to it as the “Indiana Lender Liability Act.”  . . .  Sees refers to the statute alternatively as the “Indiana Lender Liability Act” and the “Credit Agreement Statute.”  . . .  Bank One refers to the statute as the “Credit Agreement Statute of Frauds.”  . . .  We agree with the Court of Appeals’ designation and thus refer to the statute as the Indiana Lender Liability Act.

Lender liability, generally.  It is true that “lender liability” is a common phrase used to describe a borrower’s potential claims against a lender due to the conduct of the lender with regard to a particular loan relationship.  Capello & Komoroke, Lender Liability Litigation: Undue Control, 42 Am. Jur. Trials 419 § 1 (2005).  This body of law comprises a wide variety of both statutory and common law causes of action.  One of many examples is the Fair Debt Collection Practices Act.  There are, in fact, a multitude of federal and state laws that could form the basis of a lawsuit against a lender.  The ILLA is not one of those laws, however. 

The ILLA rule.  The essence of the ILLA can be found in section 4, which provides that “a [borrower] may assert a claim . . . arising from a [loan document] only if the [loan document] . . . [1] is in writing; [2] sets forth all material terms and conditions of the [loan document] . . . ; and [3] is signed by the [lender] and the [borrower].”  The ILLA effectively protects lenders from certain kinds of liability.  That’s why the label “Lender Liability Act” seemingly is inconsistent with the law’s true nature. 

Statute of frauds.  Sees provides an excellent discussion of the statute, its history and its policies.  In a broad sense, the legislative intent behind the statute is to protect lenders from lawsuits by borrowers (or guarantors) asserting fraudulent claims.  Hence the “in writing” requirement in the ILLA.  As such, the ILLA actually is a “statute of frauds,” which at its core is a procedural law about the exclusion of certain testimony of a witness at trial.  Black’s Law Dictionary defines “statute of frauds” as “. . . no suit or action shall be maintained on certain classes of contracts or engagements unless there shall be a note or memorandum thereof in writing signed by the party to be charged . . ..”  As noted by Judge Posner in Consolidated Services, Inc. v. KeyBank, 185 F.3d 817 (7th Cir. 1999):

 [T]he principle purpose of the statute of frauds is evidentiary.  It is to protect contracting or negotiating parties from the vagaries of the trial process.  A trier of fact may easily be fooled by plausible but false testimony to the existence of an oral contract.  This is not because judgment or jurors are particularly gullible, but because it is extremely difficult to determine whether a witness is testifying truthfully.  Much pious lore to the contrary notwithstanding, ‘demeanor’ is an unreliable guide to truthfulness.

Be a wise guy.  Next time someone asks you whether your commercial lending institution may have exposure to a lawsuit or a counterclaim based on Indiana’s Lender Liability Act, you can explain to them that the ILLA does not really articulate any theories of liability.  Rather, the ILLA limits breach of contract actions to the terms of the loan that are memorialized.  Again, this is not to say that there is no “lender liability” in Indiana.  The generic term “lender liability” is proper when referring to the many possible claims of wrongdoing that exist.  In short, lenders can be exposed to liability, but they shouldn’t be held liable in Indiana for any alleged violations of loan terms unless such terms (promises or duties) are in writing, signed by all parties.