Is The Label “Indiana Lender Liability Act” A Misnomer?
July 11, 2008
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] . . .  is in writing;  sets forth all material terms and conditions of the [loan document] . . . ; and  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.