Credit Agreements Between a Debtor and a Financial Institution Must be In Writing to be Enforceable
By: John Burrus, Esq. Counsel to Independent Bankers of Colorado.
In times when lender liability litigation increases, it is important to remember the existence of a Colorado law which requires that a credit agreement between a financial institution and its borrower that involves a principal sum of over $25,000 be in writing and signed by the borrower against whom the agreement will be enforced. This statute is codified in Section 38-10-124 of the Colorado Revised Statutes. This was enacted to contain and discourage lender liability suits against financial institutions arising from alleged oral representations or promises. It is also intended to provide both the creditor and the borrower with a degree of certainty that the terms of the agreement are documented in writing for present and future reference.
Neither the debtor nor the creditor may file or maintain an action or claim relating to an oral credit agreement involving a principal sum exceeding $25,000. Section 38-10-124(2), C.R.S. “Creditor” is defined as “a financial institution which offers to extend, is asked to extend, or extends credit under a credit agreement.” Section 38-10-124(1)(b), C.R.S. “Debtor” is broadly defined as “a person who or entity which obtains credit or seeks a credit agreement with a creditor or who owes money to a creditor.” Section 38-10-124(1)(c), C.R.S. In December of 2000, the Colorado Supreme Court used the amicus curiae brief filed by the Independent Bankers of Colorado through its counsel, John E. Burrus, Esq., in formulating its conclusion that “debtor” included a third-party lender who relied on assurances from a bank that permanent financing would be finalized when such third-party lender made a loan to the same borrower as the bank. Schoen v. Morris, 15 P.3d 1094, 1098 (2000). There are no implied credit agreements “under any circumstances, including, without limitation, from the relationship, fiduciary or otherwise, of the creditor and the debtor or from performance or partial performance by or on behalf of the creditor or debtor, or by promissory estoppel.” Section 38-10-124(3), C.R.S.
The statute broadly defines the term “credit agreement” as: “(I) A contract, promise, undertaking, offer, or commitment to lend, borrow, repay or forbear repayment of money, to otherwise extend or receive credit, or to make any other financial accommodation; (II) Any amendment of, cancellation of, waiver of, or substitution for any or all of the terms or provisions of any of the credit agreements defined in subparagraph (I) and (III) of this paragraph (a); and (III) Any representations and warranties made or omissions in connection with the negotiation, execution, administration, or performance of, or collection of sums due under, any of the credit agreements defined in subparagraphs (I) and (II) of this paragraph (a).” Section 38-10-124(1)(a), C.R.S.
The Colorado courts have applied the statute to “any purported agreement, negotiation, representation, or promise that assertedly amends, cancels, or waives any terms of provisions of previous credit agreement.” Pima Financial Services Corp. v. Selby, 820 P.2d 1124 (Colo. App. 1991). The statute precludes a claim in which a borrower seeks to enforce an allegedly oral credit arrangement to renegotiate the terms of the promissory note, security agreement, and deeds of trust because the note and loan documents related to a credit agreement. Norwest Bank Lakewood National Association v. GCC Partnership, 886 P.2d 299, 301, 302 (Colo. App. 1994). In a 1996 case, the borrowers who were the makers on a note sued the lender for discharge of their liability on the note because they did not execute the subsequent modifications to the note while the note’s co-makers signed the written modifications. The Colorado Court of Appeals ruled against borrowers because they executed a written promissory note that contained an express consent to future modifications of that note without notice, and with the co-makers’ signatures on the modifications, the writing and execution requirements of the statute had been met. Crown Life Ins. Co. v. Haag Limited Partnership, 929 P.2d 42, 45 (Colo. App. 1996).
The Colorado courts have used the broad definition of “credit agreement” to apply the statute to:
(i) claims involving transactions which are characterized as credit agreements (Univex Int’l Inc. v. Orix Credit Alliance, Inc., 914 P.2d 1355 (1996)); (ii) claims which merely relate to credit agreements (Norwest Bank, supra); (iii) sales agreements that contain financing terms for the proposed sale of the assets (Pima Fin. Serv., supra); (iv) settlement agreements resolving a deficiency dispute because it waived the terms of the original credit agreement upon which the deficiency claim was brought (Pima Fin. Serv., supra). In Schoen v Morris, 15 P.3d 1097-1098, supra, the Colorado Supreme Court took note of the fact that courts in other jurisdictions with similar laws have also broadly interpreted the term “credit agreement” to include:
(i) a cashier’s check in exchange for a check drawn on a sweep account, certifying a check drawn on a sweep account, and making funds represented by a check drawn on a sweep account available (Schering-Plough Healthcare Prod. Inc. v. NBD Bank, N.A., 98 F.3d 904, 911 (6th Cir. 1996);
(ii) promises to invest because a portion of the intended investment constituted debt financing (Whirlpool Fin. Corp. v. Sevaux, 96 F.3d 216, 222-23 (7th Cir. 1996);
(iii) a repurchase agreement between a manufacturer and a retailer’s lender (Cavalier Homes of Ala., Inc. v. Sec. Pac. Hous. Serv., Inc., 5 F.Supp.2d 712, 717 (E.D. Mo. 1997); an oral modification of a guarantee because the guarantee constituted part of a comprehensive credit agreement ((Bank One, Springfield v. Roscetti, 309 Ill.App.3d 1048, 243 Ill.Dec. 452, 723 N.E.2d 755, 763 (1999); and an agreement to apply a borrower’s payments to one loan for another (Rural Am. Bank of Greenwald v. Herickhoff, 485 N.W.2d 702 (Minn. 1992).
In summary, the trend in the courts is to expand the scope of the statute requiring credit agreements to be in writing beyond the standard loan or other financial accommodation to various types of financial transactions between a debtor and a creditor. This trend certainly benefits the financial institutions in that it is added protection for them against the mass of lender liability litigation based on oral promises.
Contact John Burrus at firstname.lastname@example.org
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