The Myth of “Lender Liability”
When lender and borrower relationships break down – especially where the borrower defaults in payments owed to the lender – the borrower often feels (and perhaps justifiably so) that the lender is treating them unfairly or is acting contrary to certain oral promises that may have been made at an earlier time. For instance, at the beginning of a lending relationship, the lender may tell the borrower that if there are ever any difficulties in re-payment, the lender will “work with” the borrower to bring the loan back to good terms. When payments are missed or late, the lender may even give the borrower specific proposals or “commitments” for accommodations that the lender promises to make to assist the borrower (i.e., interest only payments, modification, extension of the loan, etc.)
But unless any of these promises are in writing signed by the lender, it is not enforceable. This means that a lender’s promises – no matter how clearly and definitely made; no matter how much the borrower may have relied on them and changed its position based on them – will not be enforced by any court, unless the promise is in a writing signed by the lender. Likewise, no matter what conduct the lender engages in that the borrower believes may have misled the borrower or otherwise interfered with the borrower’s ability to repay the loan, unless the lender signed a writing containing promises it did not keep, the borrower has no claim against the lender.
Indeed, Michigan law does not recognize what other courts have referred to as claims for “lender liability.” Michigan law is clear that the only claims that a borrower has against a lender must be based on the written agreements between the borrower and lender. Michigan’s refusal to recognize claims for lender liability is rooted both in statutory law and in case law interpreting that statute. See MCL § 566.132(2); Barclae v Zarb, 300 Mich App 455 (2013).
Recently, the Michigan Court of Appeals confirmed that not only does Michigan law not recognize a claim for “lender liability” Michigan law also does not recognize a defense to an otherwise valid claim for payment on a theory of “lender liability.” In Huntington National Bank v Daniel J Aronoff Living Trust, 305 Mich App 496 (2014), the lender sued the borrowers based on the borrowers’ failure to repay a loan. In defense of those claims, the borrowers argued that the lender never followed through on a certain additional loan commitment and that the failure to follow through on the loan commitment caused the borrower to default on the existing loans. The trial court and the Court of Appeals rejected this defense and confirmed that Michigan’s standing bar on claims for “lender liability” also barred the use of a theory of “lender liability” as a defense to claims for payment on a loan.
Moreover, the Court of Appeals in Aronoff also approved an early entry of summary disposition (i.e., before discovery was complete) on the defendants’ defense of “lender liability” holding that because the defendant bore the burden of proving the existence of a written agreement to make an accommodation, it would have had possession of such an agreement and discovery was unnecessary. In fact, the Court of Appeals specifically rejected the claim that the lender’s internal documents might satisfy the burden of proving the existence of a written agreement to make an accommodation.
The lesson for borrowers is clear: any agreement to make accommodations regarding a loan from a lender must be in a writing signed by the lender, or it is not enforceable. Not as a claim. Not as a defense. Michigan law does not recognize a general claim for “lender liability” and it will not recognize a defense based on that theory either.
For more information regarding lender liability, please contact Stephen McKenney directly at Smckenney@neumananderson.com.