The Colorado Credit Agreements Act and Its Impact on Lenders and Borrowers - June 2007 - Business Law
| Jurisdiction | Colorado,United States |
| Citation | Vol. 36 No. 6 Pg. 31 |
| Pages | 31 |
| Publication year | 2007 |
2007, June, Pg. 31. The Colorado Credit Agreements Act and Its Impact on Lenders and Borrowers - June 2007 - Business Law
June 2007
Vol. 36, No. 6 [Page 31]
Business Law
The Colorado Credit Agreements Act and Its Impact on Lenders and Borrowers
by Bruce A. Kolbezen, Samuel A. Evig
Business Law articles are sponsored by the CBA Business Law Section to apprise members of current substantive law. They focus on business law topics for the Colorado practitioner, including antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, nonprofit entities, securities law, and small business entities.
Article Editors:
David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs - (719) 475-0097, dpsteig@sparkswillson.com; Rob Fogler of Kamlet Shepherd & Reichert LLP, Denver - (303) 825-4200, rfogler@ksrlaw.com; Curt Todd of Lottner Rubin Fishman Brown & Saul, P.C., Denver - (303) 383-7676, ctodd@lrflegal.com (Bankruptcy Law)
Bruce A. Kolbezen is a partner at Sherman & Howard L.L.C. He specializes in real estate law and real estate lending, and related commercial law matters - (719) 448-4030, bkolbezen@sah.com. Samuel A. Evig is an associate at Sherman & Howard L.L.C. His practice includes general real estate matters - (303) 299-8494, sevig@sah.com.
This article analyzes case law construing the Colorado Credit Agreements Act (Statute), from its enactment in 1989 through the most recent decision by the Colorado Court of Appeals. This body of case law has uniformly expanded the reach of the Statute. The scope of the Statute demands the attention of institutional lenders, their borrowers, and counsel who represent them.
The Colorado Credit Agreements Act(fn1) (Statute) provides that neither a lender nor a borrower may rely on the oral representations of the other in the context of credit agreements. The majority of case law under the Statute involves cases where a lender seeks to defeat claims by its borrower based on oral representations of the lender. However, the Statute is bilateral, notwithstanding its lender-oriented legislative history.(fn2) Consequently, the statutory shield against claims based on oral representations operates to protect borrowers, as well as lenders. The purpose of this article is to provide context for the Statute, to describe the Statute and its reach, to analyze important decisions construing the Statute, and to provide drafting suggestions for practitioners.
History of the Statute
The Colorado legislature enacted the Statute in 1989, at the end of a financial institution crisis that included rising interest rates, changes to federal tax law, and an overextension of credit, all of which contributed to instability in the lending industry.(fn3) During this time, borrowers frequently asserted claims and defenses against lending institutions based on undocumented oral representations and promises made by lenders, such as a lawsuit based on an oral promise to extend the term of a loan.(fn4)
As a preemptive measure against potential lawsuits based on oral promises, the Colorado legislature enacted the Statute. The specific intent of the legislature was to "curtail suits against lenders based on oral representations made by members of the credit industry."(fn5)
The Statute's Provisions
The operative provisions of the Statute preclude any debtor or creditor from filing or maintaining an action or a claim relating to a credit agreement in excess of $25,000 if the credit agreement is not in writing and is not signed by the party against whom enforcement is sought. In addition, and unlike other statutes of frauds, the Statute abrogates common law exceptions to its application based on performance, partial performance, and promissory estoppel.(fn6)
For the Statute to apply to a given situation, there must be: (1) a credit agreement; (2) a debtor; and (3) a creditor. The Statute's definition of these terms is discussed below.
Credit Agreement
A "credit agreement" is defined in CRS § 38-10-124(1)(a) as:
(I) A contract, promise, undertaking, offer, or commitment to lend, borrow, repay, or forebear 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 subparagraphs (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).
In deference to the legislative intent, courts have broadly interpreted the definition of credit agreement. The cases construing the Statute make it clear that oral promises to make loans, oral promises to forebear from foreclosing, and settlement agreements regarding the collection of debts are credit agreements.(fn7)
Actions or Claims Related to Credit Agreements
The Colorado Supreme Court case of Univex Int'l, Inc. v. Orix Credit Alliance, Inc.(fn8) illustrates how expansively the Statute has been applied. This case involved a struggling company run by Robert and Mary Rose (Rose), which offered to sell equipment to a rival company, Univex. The equipment was encumbered by a lien in favor of Rose's lender, Orix. The parties verbally agreed that Orix would acquire the equipment from Rose by voluntary repossession, then sell the equipment to Univex and provide financing to Univex for the purchase. The parties never signed any paperwork, but did exchange drafts of documents. Univex delivered a security deposit to Orix. Rose sold the equipment to a third party for the amount outstanding on the loan. Univex subsequently sued Rose and Orix.
The Colorado Supreme Court held that the Statute precluded enforcement of the oral agreement by Orix to sell the equipment to Univex, because that purchase and sale agreement was "related" to Orix's oral "credit agreement" to provide financing. The Court determined that the oral agreement regarding financing was an unenforceable credit agreement under the Statute. Based on that determination, the Court held that the related agreement for the purchase and sale of the equipment also was...
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