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Further Adventures of the Missouri No-Oral-Credit-Agreement Statute; Corrective Amendment Does Not Pass

As described in prior Alerts, the Missouri specialized statute of frauds covering “credit agreements” has had uneven interpretations by the courts. It has been subject to one amendment and one proposed amendment intended to overrule appellate court decisions that have limited its obvious intent, which is to eliminate all claims by borrowers and guarantors, when pursued by lenders for payment, that oral promises had been made that excused performance or that were at variance with written loan agreements, promissory notes, guaranties or similar documents. It was originally adopted as § 432.045, R.S.Mo., in 1990.

In the first two reported appellate tests of the original statute, federal courts predicted that Missouri appellate courts would interpret the statute broadly to exclude all claims, including those claims or defenses based on fraud, such as the assertion that a borrower or guarantor was “fraudulently induced” by a lender’s oral statement to enter into a written credit agreement. Horseshoe Entertainment, L.P., v. General Electric Capital Corp., 990 F.Supp. 737 (E.D.Mo. 1997); Cavalier Homes of Alabama, Inc. v. Security Pacific Housing Services, 5 F.Supp. 2d 712 (E.D.Mo. 1997). In 2003, however, the Missouri Court of Appeals in Mika v. Central Bank of Kansas City, 112 S.W. 3d 82 (Mo. Ct. App. 2003), limited the scope of the statute to contract-law claims and excluded from its coverage claims or defenses based on allegations of fraud or other equitable claims or defenses. The result was that the statute as so interpreted would not protect a lender from an assertion that a borrower or guarantor was fraudulently induced by a lender’s oral statements to enter into a loan or sign a guarantee. After Mika, such claims and defenses could continue to be asserted, often for settlement leverage, and such claims often could not be dismissed without a finding of fact – a trial, which lenders generally want to avoid.

The court in Mika did give the Missouri General Assembly specific guidance about how to fix the statute to apply to fraud and other equitable claims and defenses by pointing to the statutory language adopted by the states of Illinois and Colorado. In 2004, taking a cue from the Mika opinion, the Missouri General Assembly adopted a revised statute, § 432.047, applicable only to commercial transactions, that precluded a “debtor” (borrower, guarantor, mortgagor) from maintaining “ an action upon or a defense, regardless of legal theory in which it is based, in any way related to a credit agreement unless the credit agreement is in writing.” [emphasis added to show new language].

After its adoption, § 432.047 was attacked in at least one trial court (by a potential borrower to whom the lender refused to make a loan) under the claim that the language of § 432.047 grammatically did not negate affirmative actions based on alleged fraud or tort but only fraud or tort defenses. Crede v. First Community Bank, Case No. 0916-CB 29993-01 (Cir. Ct., Jackson County, Mo.). That case apparently was settled and did not result in an appellate opinion.

In early 2011, the U.S. District Court once again predicted that a Missouri court would hold that the revised statute would bar all tort as well as contract claims and defenses asserted by guarantors, who in that case had claimed that a lender had made oral promises to overlook the guaranteed borrower’s default, to negotiate existing loans and to extend loan maturity dates. U.S. Bank National Association v. Canny (Case No. 4:10CV421, E.D.Mo. January 24, 2011). That case was decided by the court at an early stage by granting lender’s motion to dismiss on the basis that the revised statute precluded guarantor’s claims.

Eventually, a Missouri appellate court directly addressed the revised statute and held that it was effective to negate all claims and defenses based upon allegations or oral promises, including those based on fraud or any other equitable doctrine. BancorpSouth Bank v. Paramont Properties, L.L.C., 349 S.W. 3d 363 (Mo. Ct. App., E.D. 2011).

The assault on § 432.047, however, continued and, in mid-2012, § 432.047 was the subject of a limiting interpretation in Bailey v. Hawthorn Bank, 382 S.W. 3d 84 (Mo. Ct. App. W.D. 2012). In that case, the court of appeals held that a combination of a vague commitment letter, which did not contain basic terms such as interest rate and installment payment amounts, and an internal written loan summary, which did contain the relevant terms, together constituted a written “credit agreement,” as the term is used in the statute, even though internal loan summary was never delivered to the borrower until after the borrower filed suit. The court pointed to a possible flaw in the statute by stating:

“Nowhere does Section 432.047 contain any requirement that the ‘credit agreement’ must be delivered to the other party. Where the words are clear in unambiguous, rummaging among the statutory cannons of construction to devise a different meaning is impermissible (citing numerous Missouri appellate cases for that general proposition). Here, the lack of such a delivery requirement in the statute is dispositive of the issue.” 382 S.W.3d 94-95.

As reported in an Alert in early 2013, House Bill No. 375 was introduced into the Missouri General Assembly with the clear intent of revising § 432.047 to correct what seemed to be a highly technical interpretation of § 432.047 by the court in Hawthorn. House Bill 375 would have changed the statute to prohibit a debtor from maintaining an action on a credit agreement unless the credit agreement not only is in writing but also “is executed by the debtor and the lender.” That language would have precluded any bank internal loan summary or other internal document from being interpreted as being a part of a written credit agreement on the basis of which a borrower or guarantor could make a claim or mount a defense. Unfortunately, House Bill 375 did not emerge from committee in 2013. It is uncertain whether a similar bill will be introduced in the 2014 session of the General Assembly.

In light of the limiting language in Hawthorn, commercial lenders should consider revising the “integration” section in their loan documents, including any loan commitments, in order to attempt to incorporate, as a matter of contract, language that House Bill 375 attempted to incorporate into the statute itself. The following is one possible approach, which probably should be made conspicuous (bolded and/or in all capitals):

This Agreement, together with the other Loan Documents, comprise the complete and integrated agreement of the parties on the subject matter hereof and supersede all prior agreements, written, or oral, on the subject matter hereof. Without limiting the generality of the foregoing, the “credit agreement” as defined in Section 432.047, R.S.Mo. does not include any memorandum, approval/disapproval form, summary of possible loan terms or other written document or electronic record that has been prepared by Lender unless it is executed both by Borrower and Lender.

Whether the foregoing or any other form of attempt to limit Hawthorn would be successful if tested is an open question.

Lenders should also consider whether this matter is important enough to lobby for adoption of the revision to § 432.047 attempted in House Bill 375 in order ultimately to fulfill the original intent of the statute, which was and remains to free banks from claims, regardless of legal theory relied on, that oral promises have been made that excuse performance or altered the terms of written and executed loan and other credit agreements.

While §432.047 continues to provide something of a shield to lenders against many claims (e.g. Bison Park Development, LLC v. North American Savings Bank, F.S.B. (Mo. Ct. App., W.D. No. WD75150, May 28, 2013), if not amended as attempted by House Bill 375, its language, as interpreted by the court in Hawthorn, leaves open the possibility that certain claims and defenses could be pursued that would frustrate the statute’s clear intent.