Lender Liability Act Does Not Bar Debtor From Asserting an Affirmative Defense
April 7, 2006
Michael Weissman - Chicago
In a split decision, the Supreme Court of Indiana held that when Bank One sued John Thomas Sees as guarantor of its loan to Sees Equipment, he could raise an affirmative defense notwithstanding the Indiana Lender Liability Act (Indiana Code Section 26-2-94).
The case arose because Sees Equipment defaulted on its obligation to Bank One. Thereafter, the collateral was sold, the buyers assuming the Bank One debt and then defaulting, with Mr. Sees being sued on his personal guarantee.
When sued, Mr. Sees contended that he was induced by fraud to sign the guaranty since he received an oral assurance from a loan officer that the guaranty was only taken to assure his cooperation in case of a default by the borrower. Sees v. Bank One, Indiana, N.A., 839 N.E. 2d 154 (Ind. 2005).
The issue before the Court was whether the provisions of the Indiana Lender Liability Act, that require a signed writing to memorialize the terms for an extension of credit or an agreement to forbear an enforcement action, prevent a debtor from raising an affirmative defense when sued by his creditor. The Court ruled that they did not.
Although crediting prior decisions holding that counterclaims fell within the ambit of the Act and could not be asserted by a debtor when sued by its creditor, the Court said those decisions did not go so far as to preclude the assertion of an affirmative defense.
Even after noting a decision from a sister state, Illinois, that barred the assertion of counterclaims in an action governed by a similar lender liability statute (Teachers Insurance & Annuity Association of America v. LaSalle Nat’l Bank, 295 Ill. App. 3d 61, 691 N.E. 2d 881 (1998)), the Court held that the Act only applied in instances in which a debtor sued his creditor. The Court said: “Where the creditor brings an action against the debtor, the text of the Act does not bar the debtor from asserting an affirmative defense based on an alleged oral representation by the creditor.” It said such a construction of the Act was consistent with the legislative intent to protect lenders from specious claims by debtors.
As further support for its ruling the Court cited decisions from Florida and Louisiana that allowed the assertion of affirmative defenses based on an oral agreement. Maynard v. Central National Bank, 640 So. 2d 1212 (Fla. App. 1994); Hibernia National Bank v. Contractor’s Equipment & Supply, Inc., 804 So. 2d 760 (La. App. 2001).
What’s the Point?
Decisions such as the Sees case and the cases from Florida and Louisiana serve to undermine the lender liability protections that the legislatures in at least 30 states have enacted for the protection of lending institutions. If a debtor cannot sue a creditor based on an oral agreement, why should he be permitted to defend himself based on an oral agreement? Doesn’t the same public policy that is intended to protect lending institutions when they are sued by debtors apply when they seek to collect legitimate claims from recalcitrant debtors?
For more information, e-mail Michael L. Weissman at michael.weissman@hklaw.com or call toll free, 1-888-688-8500.