Bankers operate in their own world. They are often quick to promise a loan or to renew a loan, but if that promise isn’t chiseled in stone, banks are often the first to renege or add additional conditions at closing. Much of the existing case law deals with contract interpretation and the meanings assigned to various sections of a commitment letter. But what happens when your bank fails to honor an oral loan commitment or a promise not in writing?
Many states have what is called the “Statute of Frauds.” The term really isn’t about fraud in the way you might think. A statute of frauds is a requirement that certain kinds of contracts be memorialized in a writing, signed by the party to be charged, with sufficient content to evidence the contract. In the banking world that means a written commitment letter (or at least a term sheet), signed by the bank and containing the terms of the loan.
In the real world, business people routinely do things on a handshake. That includes dealings with their bank. And that is where problems occur.
One of the typical situations we encounter is the small business with a line of credit. Typically, the line must be renewed annually. Each year as the renewal date approaches, the bank says, “don’t worry.” Since the parties have had a relationship of many years, the business owner doesn’t worry.
On the day of renewal, the bank suddenly changes its mind. That means the entire balance is due and owing immediately. Of course, when the business can’t pay, it causes a technical default on all of its other borrowings and leaves the business with no operating capital. So what happens? Either the bank doesn’t renew causing a maturity default or more often, the bank adds all types of additional conditions.
Often those conditions include more collateral or personal guarantees.
Banks generally don’t have to renew a loan or line of credit, but can they pull the rug out from you after making promises to the contrary? Can a banker simply walk away from a verbal loan commitment made to you? The banks would say that absent a written contract or signed commitment letter, they can do whatever they want.
And why would banks do this? Often they or the loan servicer senses a vulnerability in the borrower and believes they can gain control of the business. Control means adding more onerous conditions or even taking the collateral for their own account.
I once knew a landlord that owned a couple thousand residential housing units I central Maine. When the economy cooled, tenants were late with rent and he was left in a severe cash flow crunch. He owned tens of millions of dollars in assets and most with little debt. But he had no cash flow.
You probably know what happened next. The man’s bankers were not honorable people. They saw an opportunity to take control of much of his property. A revolving line of credit he enjoyed for years and which was used to purchase heating oil was terminated. Not only were there no warnings, three weeks earlier the man’s banker reaffirmed that the line would be renewed.
He claimed that the bank promised to renew. Had he known they weren’t going to do so, he could have sought other financing. The bank denied any such promise and said such promises even if made were unenforceable.
The classic, “he said, she said.” And no written commitment. Not even an email.
Our client filed for bankruptcy protection to buy time. Then he found us and we are able to turn the tables on the bank.
Does this sound familiar?
Believe it or not, your negotiating position is often gets worse s your collateral increases. No banker wants to foreclose if your debt far exceeds your assets.
Good bankers will work with you if you have plenty of equity. But bad bankers? Many of them have stopped being bankers and have instead dived into the investment world. And all the equity you have in your office building / farm / machinery business is sometimes just too tempting.
Binding Oral Loan Commitments
Can you sue your bank over a dishonored oral loan commitment or failure to renew a loan?
Yes, but these cases aren’t easy.
Whether a loan commitment is written or oral, both can be challenged for a variety of reasons. Common lender defenses include the statute of frauds, lack of specificity, vagueness, failure of the borrower to meet preclosing conditions and lack of authority.
We already touched on the statute of frauds. Courts and legislators say that some contracts need to be in writing. Even if your state has such a requirement, however, there are often ways around it. Alternative theories of liability include negligent misrepresentation and a legal doctrine called “promissory estoppel.” The latter involves a promise by the bank and reasonable reliance on that promise to the detriment of the borrower.
Specificity and vagueness refer to the actual terms of the loan. Often borrowers will tout a term sheet as evidence of a commitment, but the bank’s will counter that a term sheet is nothing more than an invitation to negotiate further.
Lack of authority is the common excuse used by banks when they have a change of heart. Invariably they will claim the loan officer didn’t have the authority to bind the bank or that the renewal never received loan committee approval.
The borrower’s failure to meet preclosing conditions is more problematic. Savvy bankers have elevated delay to an art form. Give us this, give us that…. 6 months later you still don’t have your loan and give up. Often the borrower goes under. And the banker sadly says how they really wanted to extend credit but somehow the borrower couldn’t get the paperwork right or the appraisal wasn’t high enough...
All of these defenses are powerful but when the borrower is relying on oral loan commitments, things really get hairy.
Oral loan commitments can be binding, however, especially if the any of the following three things are present:
• Detrimental reliance • Prior course of conduct (prior dealings of the parties) • Some documentary evidence.
Of course, having all three makes a borrower’s case against a bank even stronger.
To better understand these legal concepts, let’s look at an actual case study. A case where a borrower won despite the arguments of the bank that there was no written loan commitment.
Case Study – Landes Construction v. Royal Bank of Canada
Nat Landes and Eliyahu Scheinberg had plenty of experience in real estate investing. Together they reached a tentative agreement to purchase a few acres of land in Los Angeles for $50 million. $10 million was due in cash with the sellers to take a note and mortgage on the $40 million balance.
Scheinberg had an existing relationship with Royal Bank of Canada. After the bank listened to their development plans and queried their collective experience, the bank agreed to lend the men the $10 million for the down payment. At a dinner, the banker said, “We are going to lend you $10 million for this project.”
Relying on this, Landes went back to the sellers to finalize a purchase agreement.
There were the usual further meetings with the bank. Royal Bank of Canada even advanced $3 million to Scheinberg for the initial down payment.
A purchase and sale contract was signed and everyone geared up for a quick sale. Five days before the loan was to close, the bank reneged. Landes and Scheinberg were unable to come up with substitute funds. They forfeited the $3 million initial down payment. Worse, Scheinberg was still on the hook for the money advance by the bank!
Landes and Scheinberg sued the bank. After a jury trial, both men were awarded $18.5 million in damages.
The bank appealed. This case is one of the few appellate court cases dealing with verbal loan commitments and the interplay with the statute of frauds. (California has a statute of frauds requiring promises “to grant a lien against real property as security for a debt” should be in writing.
In upholding the jury verdict in favor of the borrowers and against the bank, a three-judge appeals panel said,
“As this was a suit on an oral contract, the trial consisted of little more than a swearing contest. As our recitation of the facts show, Landes testified that Neapole [the banker] told him the bank would lend [borrowers] $10 million. Scheinberg testified that he and Neapole reached an agreement on the essential terms of the loan contract for the down payment. Neapole denied both of these assertions. Neither party disputes that the various meetings occurred, that the bank advanced $3 million, that these funds went to the sellers, or that [the borrower] was the buyer named in the purchase agreement. The bank's attacks against the verdict center on what inferences should be drawn from this and other evidence in the record. One reasonable inference, however, is that the bank promised to lend the construction company the $10 million for the down payment. Accordingly, we must affirm the jury's verdict.”
Obviously, it’s always better to get a promise from a banker in writing. A written loan commitment is best but absent that, a term sheet or even confirming emails are better than nothing. And if you are relying on the bank’s promise, make sure they know that.
In the Royal Bank of Canada case, the jury heard testimony that Landes and Scheinberg were signing a $50 million contract based on the bank’s promise. They also heard that the $3 million advanced to Scheinberg was going to the sellers of the property. That is powerful evidence showing detrimental reliance.
Can I Sue for Failure to Honor Oral Loan Commitments or Renew a Loan?
If you are wondering if you can sue your lender for failure to renew a loan or honor oral loan commitments, call us. Our team of lender liability lawyers have helped borrowers across the country.
Unlike most banking lawyers, we never represent banks. Our practice is exclusively focused on representing people and businesses against banks, mortgage companies and servicers. To see if you have a case, contact attorney Brian Mahany online or at [hidden email] or by phone at 877-858-8018 (direct). All inquiries kept strictly confidential.
We also invite you to visit our theories of liability page for more information on a bank’s failure to honor a loan commitment or to renew a loan.
(We regret that we cannot accept consumer cases. Our general minimum amount in controversy is $5 million but call us if you are close.)