Limiting Lender Liability Through the Statute of Frauds
| Publication year | 1989 |
| Pages | 1725 |
1989, September, Pg. 1725. Limiting Lender Liability Through the Statute of Frauds
The Colorado legislature recently amended the statute of frauds(fn1) to require certain credit agreements to be in writing in order to be enforceable. The amendment was originally proposed to protect banks from spurious claims based on alleged oral commitments to lend and on other acts outside of the loan documents. However, the new law's evenhanded approach to the problem puts both parties on notice that credit terms must be in writing to be enforceable. This article contrasts the Colorado statute with similar legislation in other states and alerts parties to potential applications of the law and ways to protect their interests thereunder.
Statutes of frauds are designed to prevent the perpetration of fraud by perjury.(fn2) Under a typical statute of frauds, certain agreements are unenforceable unless they are in writing and signed by the party sought to be bound. The types of oral agreements that have traditionally been voided by statutes of frauds are contracts for interests in land, agreements that are not to be performed within one year after their making and promises to answer for the debts of others.(fn3)
The prevention of fraud comes at the expense of permitting those who have in fact made oral promises to break them with impunity. Therefore, statutes of frauds are generally narrowly construed and are subject to certain exceptions. For example, under Colorado law, part performance may take the place of a writing and permit enforcement of an otherwise unenforceable oral contract.(fn4) Estoppel also may remove a contract from the statute of frauds.(fn5)
In recent years, banks have become increasingly vulnerable to suits based on alleged oral commitments to lend.(fn6) Many such suits have been brought by debtors engaged in agriculture or real estate development, whose creditworthiness has been impaired by the downturn in those industries. In an effort to discourage some of these suits and in response to lobbying by commercial banks, legislatures in those states where banks have been affected significantly, such as California, Texas, Oklahoma, Kansas, Louisiana, Georgia and Minnesota,(fn7) have enacted amendments to their statutes of frauds to bar suits brought on oral promises to lend.(fn8) These laws generally protect financial institutions from liability on large commercial loans. Some of the laws expressly exclude consumer credit transactions, and most are inapplicable to claims below stated dollar amounts.
The new law, CRS § 38-10-101 et seq., which affects credit agreements entered into on or after July 1, 1989, is a result of lobbying efforts by the Colorado Bankers Association, a trade group comprised of commercial banks throughout the state. The statute, heavily amended in its passage through the legislature, was proposed to prevent certain oral statements or failures of lenders to take action from constituting new credit agreements or revisions to existing agreements. Thus, it was intended to prevent misunderstandings between parties to credit agreements and to introduce certainty into what is too often an informal process.
Consistent with its origin, the amendment protects creditors that are financial institutions and covers financial arrangements of all types. In a sharp departure from recent legislation in other states, it also attempts to abrogate judicially developed exceptions to the statute of frauds, such as part performance and estoppel, which could otherwise provide a basis for enforcing an oral loan agreement. The only significant limitation on the reach of the Colorado statute is that it does not apply to claims involving principal amounts below $25,000. As discussed below, although the amendment generally defines key terms in a manner that provides maximum protection to banks, the statute also may inure to the detriment of banks that fail to document fully their credit transactions.
The term "creditor" is defined as a financial institution that offers to extend, is asked to extend or does extend credit to a debtor under a credit agreement(fn9)
The Colorado statute protects a significantly narrower class of creditors than do similar laws recently enacted in California, Georgia, Minnesota, Texas and Oklahoma.(fn11) For example, the California statute(fn12) protects any person engaged in the business of lending or arranging for the lending of money or extension of credit, covering individuals such as mortgage brokers and private investors as well as banks and other financial institutions. The Texas and Oklahoma statutes protect only financial institutions, but define them somewhat differently from the Colorado amendment. The Texas statute defines financial institutions to include holding companies and their subsidiaries and affiliates, credit unions and HUD-approved lenders, whereas the Oklahoma statute includes holding companies and their subsidiaries, but not mortgage companies or individuals(fn13)
Consistent with its intent to provide maximum protection to banks, the Colorado law does not attempt to limit the identity of debtors that...
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