Loan Officer’s Verbal Assurances Do Not Create an Obligation of the Bank to Extend Credit
 
May 16, 2005
 
Michael Weissman - Chicago

In a rehash of an old lender liability story, a rejected loan applicant sought to impose liability upon a bank based upon assurances provided by the bank’s loan officer. The court rejected the applicant’s complaint in Flomeh-Mawutor v. Banknorth, N.A., 350 F.Supp.2d 314 (D.Mass. 2004).

The plaintiffs conducted a new business, called Free Horizons, that purchased end of the season new clothing and used clothing and exported it to Ghana.

On February 18, 2000, the plaintiffs met with a loan office of Banknorth to discuss obtaining an SBA loan. At that time, the plaintiffs provided the loan officer with a copy of their business plan which stated that Free Horizons would obtain Export Credit Insurance from the Export-Import Bank of the United States (EX-IM Bank).

At first, it was contemplated that Free Horizons would apply for a $150,000 loan. Later, it was determined that applications should be filed for two separate loans, i.e., a $135,000 line of credit and a $64,000 equipment loan.

On June 29, 2000, the SBA advised the bank that it had conditionally approved the $135,000 line of credit. The SBA loan authorization specifically required Free Horizon to have EX-IM Bank credit insurance under a policy naming SBA as assignee of all claim proceeds or designating SBA as loss payee under the policy.

The bank issued a commitment agreement in July 2000 that stated it was subject to all of the terms and conditions of the SBA loan authorization. The agreement also expressly stated that the “Borrower should not rely on this commitment for the purpose of committing funds or assuming other liability until both final documentation is executed and any remaining credit or financial contingencies in this agreement have been fully completed to the Bank’s satisfaction… .” The plaintiffs signed this document as officers of the borrower.

Subsequently, the loan officer learned that Free Horizons would not qualify for EX-IM Bank credit insurance. The loan officer withdrew the application he had filed with SBA and notified the plaintiffs that the loan application would not be approved.

The plaintiffs sued the bank asserting that throughout the application process they were assured their application had a high probability of success. Because of these assurances, they said they had made many financial commitments resulting in losses in the millions of dollars.

The evidence before the court included a deposition from one of the plaintiffs stating that everything the loan officer told him about the application process was true. It also indicated that plaintiffs had been sent a Statement of Credit Denial that clearly stated that the lack of EX-IM Bank insurance was the reason for the denial.

Finding no evidence of common law fraud, the court ruled in favor of the bank.

What’s the point?

A clearly articulated review of the loan application process at the first meeting with prospective borrowers followed by documentation that plainly stipulates the conditions to funding will protect lenders against a specious claim that a commitment to extend credit had been made.¹

For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.

¹ As will the statutory enactments in approximately 30 states that require commitments to lend be in writing and executed both by the prospective borrower and on behalf of the lending institution.