Indiana’s Lender Liability Act Once Again Protects Bank From Borrower’s Claims

Indiana’s Lender Liability Act (Ind. Code § 26-2-9) saved another secured lender from litigation-related delays and costs.  Indiana Bank and Trust v. Hirsch, 2010 U.S.Dist. LEXIS 18505 (S.D. Ind. 2010) (.pdf) falls in line with my December 31, 2008 post regarding the Classic Cheesecake Company case.  When borrowers try to insert oral terms into written loan agreements, the Act is the lender’s first line of defense.

The problem.  The issue for the lender in Hirsch surrounded an alleged conversation that occurred between the borrower and the lender’s loan officer at the time of the origination of the subject loan.  The two individuals discussed the prospect of later converting the short-term line of credit into a conventional long-term mortgage loan.  The borrower subsequently defaulted on the loan by failing to pay off the line of credit by the maturity date.  In his defense, the borrower asserted that he entered into the loan based upon the loan officer’s promise that the short-term line of credit would later be converted into a long-term loan. 

Procedural posture.  The litigation started with the lender filing a mortgage foreclosure action against the borrower.  The borrower filed counterclaims for breach of contract, fraud and promissory estoppel – all based upon the allegation of an “oral agreement between [borrower] and [loan officer] that [lender] would, at some later time, convert the original line of credit into a long-term mortgage.”  The lender filed a motion to dismiss the counterclaims, together with its own motion for summary judgment.  Judge Barker of the Southern District of Indiana granted all of the lender’s motions. 

Missing link.  The borrower’s counterclaims all centered on the theory that a contract or commitment for long-term financing existed – in essence, that the loan should not have matured.  Significantly, however, there was no writing to support the borrower’s case.  The Court cited to I.C. § 26-2-9-1 and 5 and concluded that “even assuming all of the allegations in the counterclaim to be true, the contract alleged by the [borrower] never actually existed because it failed to meet the requirements of [the Indiana Lender Liability Act].”  The absence of a written, signed agreement was fatal to the borrower’s breach of contract counterclaim.  For similar reasons, the Court granted the lender’s motion to dismiss the borrower’s fraud and promissory estoppel claims.

Secured lenders in Indiana mortgage foreclosure cases, when faced with allegations of alleged oral promises that vary written loan agreements, need to remember that I.C. § 29-2-9 generally requires credit agreements to be in writing and signed.  Hirsch is a favorable decision for lenders, particularly because the Court entered an early dismissal of the borrower’s counterclaims that prevented litigation-related holdups and additional expense.