Mountain Law: Unsigned agreement with your lender? Beware the Colorado Credit Agreements Act
A “statute of frauds” is a law that requires certain types of agreements to be in writing. The types of agreements that are traditionally unenforceable unless in writing include contracts for the purchase and sale of land, agreements where performance will not start until more than one year after their making and promises to be responsible for another person’s debts.
The prevention of fraud comes at the expense of permitting those who have in fact made oral promises to break them with impunity. To address concerns about broken oral promises, the law traditionally subjects the statute of frauds to certain exceptions. For example, Colorado allows the partial performance of the contract by both parties to take the place of a written agreement under certain circumstances.
That brings us to the Colorado Credit Agreements Act, known as the CCAA, which was enacted in 1989 in response to a financial crisis. It was the result of lobbying efforts by the Colorado Bankers Association, a trade group composed of commercial banks throughout the state. Before that time, lending institutions did not enjoy any special exceptions to the statute of frauds. This meant that they could be, and often were, sued to enforce oral agreements with respect to loans.
On its face, the CCAA applies equally to lenders and borrowers. It provides that neither a lender nor a borrower may rely on the oral representations of the other relating to credit agreements (and that any such agreement must be signed in writing). However, the majority of cases under the CCAA involve a lender seeking to defeat claims by its borrower based on oral representations by the lender. Thus, in practice, the CCAA is primarily a lender-friendly statute that can have extreme consequences for borrowers.
The CCAA only applies to institutional lenders such as banks. It generally does not protect individuals or mortgage brokers regardless of the regularity with which they engage in loan transactions. However, the CCAA only applies where the dollar amount of the agreement is in excess of $25,000.
The CCAA defines the term “credit agreement” broadly to include any financial accommodation whatsoever. This can have surprising consequences. For one, the CCAA covers many types of agreements — such as overdrafts — that traditionally were not reduced to writing. It therefore forced institutional lenders to require borrowers to sign additional documents.
For another, because the CCAA bars any oral agreement “relating to a credit agreement,” it has been interpreted to bar incidental oral agreements. For instance, one case involved a party claiming that a lender reneged an oral agreement to sell certain collateral after the lender foreclosed it. The party’s claim was deemed barred by the CCAA because it related to an underlying credit agreement that led to the foreclosure, even though that agreement had little to do with the oral agreement to buy the collateral. This result calls into question many oral agreements in commercial deals that involve institutional financing in any way.
Perhaps the most significant aspect of the CCAA is that it specifically precludes the traditional exceptions to the statute of frauds, such as partial performance. So, for instance, assume that a lender sends a borrower a proposed loan modification agreement and the borrower signs it and sends it back, but lender never signs the agreement. The agreement would arguably be unenforceable (even if both lender and borrower partially performed under the agreement). The lender could then claim the total amount due at a later time. If this seems absurd, I have seen lenders take advantage of the CCAA in this manner several times.
The CCAA raises many other issues not discussed here.
Anyone seeking to rely on an unsigned agreement that relates to financing by an institutional lender should take caution of its potential impact.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado. He may be reached at (970) 468-4953 or Noah@TheKlugLawFirm.com.
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