Credit Agreement Statute of Frauds
In February 2015, the Nebraska Supreme Court rendered its decision in the case Synergy4 Enter. v. Pinnacle Bank, 290 Neb. 241 (2015). In that case, Synergy4 Enterprises (“Synergy”) alleged that Synergy’s owners (last names Quinn and Bauer) had met with a branch president of Pinnacle Bank (“Bank”) prior to Synergy’s incorporation. Synergy claimed that the branch president orally approved a line of credit for at least $1 million. After the meeting, Pinnacle provided Quinn and Bradley with a commitment letter for a loan of $400,000. Notwithstanding the commitment letter, Synergy alleged that the branch president orally assured Quinn and Bradley that Pinnacle would still provide a loan for $1 million.
According to Synergy, after receiving the branch president’s oral assurance, Quinn and Bradley incorporated Synergy, entered into a 5-year lease, and went to China on a 5-week purchasing trip. During this trip, Quinn committed Synergy to approximately $1.6 million in inventory purchases. Sometime thereafter, Pinnacle informed Synergy that Pinnacle would not be lending more than the $400,000 provided for in the commitment letter.
Synergy filed a lawsuit against Pinnacle alleging three causes of action. The causes of action all generally alleged that Synergy relied on the branch president’s oral promises to loan money, and that Synergy suffered damages when Pinnacle ultimately did not make the loan. Pinnacle moved for summary judgment, alleging that Synergy’s claims were barred by Nebraska’s credit agreement statute of frauds because the purported $1 million credit agreement was not in writing. The district court sustained Pinnacle’s motion, and Synergy appealed.
The Nebraska Supreme Court affirmed the district court’s decision, siding with Pinnacle. First, the court reviewed the credit agreement statute of frauds. That statute states:
A debtor or a creditor may not maintain an action or assert a defense in an action based on a credit agreement unless the credit agreement is in writing, expresses considerations, sets forth the relevant terms and conditions of the credit agreement, and signed by the creditor and by the debtor.
Neb. Rev. Stat. § 45-1,113. For purposes of the statute of frauds, “credit agreement” means “a contract, promise, undertaking, offer, or commitment to loan money or to grant or extend credit.”
The Nebraska Supreme Court concluded that the statutory language was unambiguous, and prohibited Synergy’s action since the credit agreement was not in writing. Importantly, the court also determined that the statute supersedes common law causes of action like promissory estoppel and negligent misrepresentation. Specifically the court stated, “[w]e similarly conclude that [the statute of frauds] bars Synergy’s claims for negligent misrepresentation. ‘Regardless of whether the present cause of action is labeled as a breach of contract, misrepresentation, fraud, deceit or promissory estoppel, its substance is that of an action upon an agreement by a bank to loan money. Therefore, the credit agreement statute of frauds applies.'” Thus, not only was Synergy precluded from maintaining a suit for breach of contract, but also from bringing equitable claims against Pinnacle based on Synergy’s reliance on Pinnacle’s alleged oral promises.
Although a bank can take comfort in the fact that Nebraska prohibits actions based on unwritten credit agreements, banks should avoid making such promises. Reducing these agreements to writing provides clarity as to rights and obligations and can reduce the likelihood of litigation.