Practice pointer: When is an agreement enforceable against a bank? | Miller Canfield
The short answer is that an agreement is enforceable against a bank when the agreement is written and signed by the bank. But the answer really depends on the jurisdiction concerned.
Many states have adopted special fraud statutes to protect banks. These statutes require the existence of a written agreement signed by a bank before a lawsuit can be brought against the bank. These statutes exist in many states, including California, Illinois, Indiana, Michigan, Ohio, and Texas. In some of these states, such as Michigan (MCL 566.132), Illinois (through its Credit Arrangements Act, 815 ILCS 160/2) and Indiana (ind. Code § 26-2-9 -4), the debtor can only assert a defense to an action brought by a bank to enforce a loan agreement if the defense is based on an agreement signed by the bank. Some states, like Indiana, protect more creditors than just financial institutions, while other states, like Michigan and Ohio (ORC § 1335.02), only protect financial institutions. In Texas, to have full fraud statute protection, additional notice is required. Tex. Bus. & Com. Condé §26.02 (e). California’s fraud statute is rather limited in scope, but still provides a layer of protection for banks. Cal. Civ. Code §1624 (a) (7).
These statutes deal with oral communication, such as a phone call or a meeting. However, in our high tech world, especially during the COVID-19 era, most communication between a lender and a borrower is via email. An e-mail is written, but is it signed by the bank? This answer depends on what is meant by signature. Article 9 of the Uniform Commercial Code uses the term “authenticate”, which means more than a signature. The broad definition of “authenticate” may well include an email. See UCC 9-102 (7) (B) [Note: Cal. Civ. Code § 1633.3(b)(3) expressly carves out secured transactions under Article 9 in respect to transactions within the scope of the Uniform Electronic Transaction Act in California.] The answer to these questions, including the governing law, is technical in nature and is beyond the scope of this email.
To avoid making an involuntary commitment or offer, pay attention to the words that are used in any written communication with a borrower or guarantor. If a bank wishes to make a proposal for discussion, the loan officer should clearly state this. In addition, disclaimer that the communication is neither an offer nor a commitment, and that any forbearance, modification or waiver is subject to the bank’s final review and approval, and documentation acceptable by the bank board, can provide an extra layer. protection. If this hasn’t been done recently, we recommend that you review your standard disclaimer wording with your lawyer.
This electronic alert is the first in a series of practical advice on loan issues, with a particular focus on distressed loans.