Lesson. In Indiana, borrowers generally cannot use oral statements of lenders to contradict or alter the written terms of a promissory note.
Legal issue. Whether Lender’s pre-closing email committing to a post-closing loan modification precluded summary judgment for Lender in loan enforcement action.
This case arose out of an SBA loan for the purchase of a grocery store. Lender’s loan was secured by a mortgage, personal guaranties, and a security interest on all of Borrower’s assets. Due to financial difficulties with the store, Borrower defaulted on the loan, and Lender filed suit seeking to recover on the approximate $1.8 million debt.
A complicating factor to this otherwise straightforward case surrounded a guaranty executed by a son of one of the owners/members of Borrower (“Son”). Son was reluctant to sign off. The loan officer, after speaking to Lender’s president, sent the following email to the father:
Please tell [Son] there is nothing to worry about. I have spoken to [president] and he assured me that within three months of this closing, the bank will refinance and transfer the loan to [another guarantor]. This refi will get you some working capital and also absolve [Son] of the SBA's guaranty. It's just a matter of three months or at most four months. After the initial closing, the SBA is no [longer]in [the] picture and the bank has more leeway in these matters.
If you want, I can speak to [Son] personally. Also please ask [Son] to sign the [l]ease and reassignment of rents, and some additional documents that were sent to you to forward him for his signatures. Have you forwarded them to [Son] yet[?] Hopefully he will sign off on those once he knows that we will get him off the loan/SBA guaranty within 3-4 months. You also have to finalize some details in [Son's] life insurance. We will need the policy to close.
(the “Email”). These representations were not incorporated into the loan documents, however. The refinance never occurred.
Procedural history. Lender filed a motion for summary judgment that the trial court granted. Borrower appealed.
Key rules. Indiana Code Section 26-2-9-4 bars enforcement of oral "credit agreements" unless they (l) are in writing; (2) set forth all material terms and conditions of the credit agreement; and (3) are signed by the creditor and the debtor.
Holding. The Indiana Court of Appeals affirmed the summary judgment for Lender.
Policy/rationale. In response to the summary judgment motion, Borrower filed an affidavit from Son showing that Lender reneged on its promise to remove Son as guarantor upon refinancing. Borrower’s defense theory was fraudulent inducement. The Court concluded that the Email “fell short” of the requirements of I.C. 26-2-9-4 because it did not mention the promissory note’s terms and was only a discussion about a possible future modification of Son’s guaranty. Thus, neither Son’s affidavit nor the Email created an issue of fact precluding summary judgment. Note: the Hinsdale Bank case dealt only with Lender’s action against Borrower. Lender was not enforcing Son’s guaranty at the time. Had Son been a party, the opinion suggests the outcome would have been the same, which is to say the Email may not have absolved Son from personal liability.
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