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Proposed Revision to Missouri No-Oral-Credit-Agreement Statute in Response to Court-Limiting Holding

In 1990, the Missouri General Assembly adopted a specialized statute of frauds covering “credit agreements,” §435.045. Its obvious intent was to eliminate claims by borrowers and guarantors, when pursued by lenders for payment, that oral promises had been made that excused performance or were at variance with written agreements (notes, loan agreements, guaranties).In 2003, 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 claims and excluded from its coverage claims or defenses based on fraud, such as an assertion that a borrower or guarantor was “fraudulently induced” by lender’s oral statement to enter into a loan or sign a guaranty.In response to Mika, one year later the Missouri General Assembly adopted a new statute, §432.047, similar to §432.045 but applicable only to commercial transactions, that precluded a debtor from maintaining an action on or a defense in any way related to a credit agreement regardless of the legal theory upon which it was based. Eventually, a Missouri appellate court held that the new statute was effective to negate all claims and defenses based upon allegations of oral promises, including claims or defenses based on fraud or any other equitable doctrine. BancorpSouth Bank v. Paramont Properties, L.L.C., 349 S.W.3d 363 (Mo. App., E.D. 2011).In mid-2012, § 432.047 was the subject of yet another limiting interpretation by a Missouri appellate court. In Bailey v. Hawthorne Bank (Case No. WD 74240 July 31, 2012) (reported on in an August 2012 Spencer Fane Alert), the Missouri Court of Appeals, Western District, held that the 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 contained interest rate and other relevant terms, constituted together a written “credit agreement,” as the term is used in §432.047. As a result of that holding, the appellate court upheld a jury verdict against the bank for failure to make a loan to the borrower based upon that written “credit agreement” and awarded the borrower $310,000 for breach of the agreement plus $200,000 in punitive damages for negligent misrepresentation.The bank unsuccessfully argued that the internal loan summary was not a part of a written “credit agreement” as defined in § 432.047 because the borrower never received the loan summary until after he filed suit and the borrower offered no legal authority that would have allowed an internal memorandum, never given to the borrower, to satisfy the terms of § 432.047 as a written credit agreement. To support its position that the internal loan summary was a part of the written credit agreement, the court stated:

“Nowhere does Section 432.047 contain any requirement that the ‘credit agreement’ must be delivered to the other party. Where the words are clear and unambiguous, rummaging among the statutory cannons of construction to devise a different meaning is impermissible (citing numerous Missouri appellate cases).”

With the intent of correcting what would seem to be the court’s tortured interpretation of § 432.047, House Bill No. 375 has been introduced into the 2013 Regular Session of the Missouri General Assembly. It would change §432.047 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 preclude any bank internal loan summary 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.If HB 375 is adopted, the notice required to be stated in a credit agreement of the existence and impact of §432.047 would be slightly revised to state that “oral or unexecuted agreements or commitments” would not be enforceable.As of mid-February HB 375 had been assigned to the Judiciary Committee of the Missouri House. A hearing date on HB 375 had not been set.Lenders should consider emphasizing to their state legislators the importance of adopting HB 375 in order, once again, to clarify the clear intent of the no-oral-credit-agreement statute, when first adopted in 1994 as §432.045, which was and remains to free banks from claims that oral promises had been made that excused the performance of written and executed loan and other credit or guaranty agreements.We will report the progress of HB 375.