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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. 

Next Up For A Bailout - Real Estate Developers?

The Wall Street Journal and Reuters, among others, are reporting today that the commercial real estate industry is angling for governmental assistance.  Here are the links:

WSJ:  Developers Ask U.S. for Bailout as Massive Debt Looms

Reuters:  Commercial property industry seeks bailout aid 

Certain sources forecast the potential for a high volume of foreclosures over the next couple years as commercial real estate loans mature.  But, is a bailout warranted ... or even workable?  I'm scratching my head. 

I'll keep an eye out for further news stories and commentary on this developing situation.  

Promissory Note = Negotiable Instrument

On November 13, 2008,  the United States District Court for the Northern District of Indiana in United States of America v. Lockett, 2008 U.S. Dist. LEXIS 92998 (Lockett.pdf) granted summary judgment in favor of lender in a straightforward promissory note default case.  Lockett provides a nice primer on Indiana’s basic rules surrounding promissory notes and the evidentiary hoops through which a lender must jump in order to obtain a summary judgment in federal court.

Federal court summary judgment standard.  The procedural standard for summary judgments in Indiana’s federal courts is different from Indiana’s state courts.  Without going into detail, the movant’s initial procedural burden is easier to meet in federal court.  For those interested, here is the procedural standard as articulated in Lockett:

Summary judgment is appropriate when “the pleadings, depositions, answers to the interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.”  Fed. R. Civ. P. 56(c).  In deciding whether a genuine issue of material fact exists, “the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.”  No genuine issue of material fact exists when a rational trier of fact could not find for the nonmoving party even when the record as a whole is viewed in the light most favorable to the nonmoving party.  A nonmoving party cannot rest on mere allegations or denials to overcome a motion for summary judgment; “instead, the nonmovant must present definite, competent evidence in rebuttal.”  Specifically, the nonmoving party must point to enough evidence to show the existence of each element of its case on which it will bear the burden at trial. 

(Indiana’s state court standard requires the movant to designate evidence that definitively negates each element of the nonmovant’s case.)

Promissory note, defined.  Judge Miller reminds us that a promissory note “is a negotiable instrument subject to Indiana’s version of the Uniform Commercial Code.  See, Ind. Code § 26-1-3.1-104.  In Indiana, the holder of a negotiable instrument (usually, a lender) may recover on the instrument simply by:

  producing the signed note, or a copy;
  proving that the note was executed; and
  showing that the note is due and unpaid.

See, I.C. § 26-1-3.1-308.  Typically, these matters easily are established by filing an affidavit from a lender representative.  At that point, the only way the defendant (the borrower) can avoid entry of judgment is to prove some defense to liability.  The potential defenses are too voluminous to list or discuss here, but they would involve, for instance, evidence that the borrower did not sign the note or that the borrower contests the amounts due. 

In Lockett, the borrower failed to refute any of the lender’s factual allegations and failed to raise any legal defense to negate her responsibility to pay the full amount of the loan.  The borrower, who was unrepresented in the litigation, simply expressed a desire to settle the debt.  Accordingly, the Court concluded that there were no genuine issues of material fact for trial and held that the holder of the note was entitled to a judgment as a matter of law in the amount requested.

The fundamentals.  The Lockett case warranted a short post to remind secured lenders and their counsel involved in Indiana commercial foreclosures of the basic proof needed to obtain a pre-trial disposition of the case through summary judgment.  For the Indiana lawyers who may be reading, Lockett would be a nice case to cite in a summary judgment brief involving a default on a promissory note.