The Next Lender Challenge: A Lender’s New Nemesis
January 1, 2009
On the tail end of the last financial disaster the banking lobby came through for lenders and the General Assembly of Illinois passed into law the "Credit Agreements Act" (815 ILCS 160/1) (the "Act") in 1991. Under Section 2 of the Act, a debtor may not maintain an action in any way related to a credit agreement unless a credit agreement is in writing and expresses an agreement or commitment to lend money or extend credit or delay or forebear payment of money, sets forth relevant terms and conditions and is signed by the creditor and the debtor.
The passage of the Act was a response to frivolous litigation between lenders and borrowers concerning alleged behaviors of lenders that modified the underlying loan documents. The defenses ranged from promises to lend or forebear, to allegations of negligently advising borrowers on how to repay their loans. The Act was essentially a "statute of frauds" which prohibited any modification of the underlying loan documents unless the lender and the borrower executed a subsequent agreement modifying the underlying loan documents. The passage of this Act has led to expedited litigation for repayment of loans and few, if any, actions against lenders for lender liability related to their normal and everyday behavior. Claims can still be brought against lenders for "controlling" the debtor or for actual fraud but most other frivolous defenses have been eliminated or curtailed by the Act. As a result, in Illinois and other states that have adopted the Act or similar acts, things have been relatively quiet on the lender liability front.
Currently, it is anticipated that loan defaults may rise by as much as 8 to 10% in 2009. This is astounding increase given the low or non-existent default rates within the last decade. As the defaults increase, so will the defenses against lenders for the repayment of the loans.
There are no shortages of attorneys attempting to figure out ways to attack lenders. One method that has not been used yet, but most certainly should be watched, is the theory that an e-mail exchange has created a contract modification between the parties. We have observed this attack in corporate, employment and securities areas recently.
Generally, we have also observed an inattention to grammar, a lack of sensitivity about the character of individuals and a lack of thought put into e-mail. We need to treat email the same as anything else that might be put in writing. You should believe that all of your e-mails may end up in front of a judge. This is especially true as "E-Discovery" becomes part of your day-to-day risk management assessments.
In a case in New York that is exactly what happened to one defendant. The Court found that the parties had agreed to modify the duties under an employment agreement because the e-mails of the parties constituted "signed writings" within the meaning of the statute of frauds. The Court held that because the individual's name was at the end of the e-mail that it constituted a "signed writing" and satisfied the terms of the agreement which required that a modification must be signed by all parties. This decision was probably correctly decided as it is not necessary to have a written confirmation be signed in ink or that the person actually sign their name. Illinois judges have already ruled similarly in cases concerning disputes over the sale of goods.
It is our belief that debtor's counsel will begin to review the e-mail of lenders where an offer has been requested by a debtor and a lender has confirmed that offer without realizing that such an exchange may constitute a modification of the credit agreement. If you are in a workout or you are at all concerned that your e-mail may be construed as a modification to the loan documents, you should use the following language at the end of your e-mail to be clear about your intentions: "Notwithstanding anything above, nothing contained in this e-mail communication shall be deemed a waiver of any of the Bank's rights under the loan documents by and between the Bank and [Borrower], or shall be deemed a modification to any of the loan documents executed by [Borrower]."
Defaults are back and the marketplace is in tatters. There will be significantly more litigation between lenders and borrowers in the years to come. Watch your e-mails carefully. You know your borrowers and their counsel will be doing so.
This data point is sent by the firm of Levenfeld Pearlstein to advise our clients in lending and borrowing areas to be careful about modifying your contracts through the nonchalant exchange of e-mail. If you are a lender creating new terms through your e-mail and those are agreed to by a borrower, you might find a crafty borrower's lawyer indicating that on behalf of a lender, you have in fact have modified the underlying loan documents through piecing together emails. Obviously, an inadvertent modification to loan documents in an e-mail will not have been approved by your loan committee and the Bank will find that it has lost the type of control that it would like to exercise by having a third-party approval process.
Contact Steven Bright, Bryan I. Schwartz or William Schwartz at Levenfeld Pearlstein, LLC should you have any further questions regarding this matter. All rights reserved. 2009 Levenfeld Pearlstein LLC