Often times there are apparent attempts to modify loan agreements (e.g., promissory notes, repayment contracts, purchase agreements, etc.) orally. This is especially true with promissory notes or mortgages when the debtor/paying party requests more time to make payments. In Missouri, however, oral modifications to credit agreements are not valid unless they are in writing. Section 432.047.2, RSMo (the “Creditor Statute of Frauds”) provides that “[a] debtor may not maintain an action upon or a defense, regardless of legal theory in which it is based, in any way related to a credit agreement unless the credit agreement is in writing, provides for the payment of interest or other consideration, sets forth relevant terms and conditions, and the credit agreement is executed by the debtor and the lender.” [emphasis added]
What constitutes a “credit agreement”? It is defined as an “agreement to lend or forbear repayment of money, otherwise extend credit, or to make any other financial accommodation. Section 432.041.1, RSMo. Although the statute has a very broad application (e.g., private business loans, private personal loans, etc.), it was enacted mostly to protect banks from losing their right to enforce a loan according to the terms of the written loan documents if they informally attempt to accommodate debtors/borrowers. As such, this statute overrides many common law theories which could otherwise be used as a defense in a dispute over a credit agreement, including but not limited to equitable estoppel and promissory estoppel.
Equitable estoppel prevents one from denying his/her own express or implied admission in one instance and then taking a contrary position in another instance. Farmland Industries, Inc. v. Bittner, 920 S.W.2d 581, 583 (Mo. Ct. App. 1996). There are three elements: (1) an admission, statement, or act inconsistent with the claim afterwards asserted and sued upon; (2) action by the other party on the faith of the admission, statement, or act; and (3) injury to such other party, resulting from allowing the first party to contradict or repudiate the admission, statement, or act. Id. Before the creation of the writing requirement for credit agreements, it was very easy and common for a debtor to invoke equitable estoppel by arguing that a representative or agent from a bank/credit orally agreed to postpone payments.
Promssory estoppel has four elements: (1) a promise; (2) on which a party relies to his or her detriment; (3) in a way the promisor expected or should have expected; and (4) resulting in an injustice that only enforcement of the promise could cure. Clevenger v. Oliver Ins. Agency, Inc., 237 S.W.3d 588, 590 (Mo. 2007). It is similar to equitable estoppel. A claim of promissory estoppel, just as the defense of equitable estoppel, relating to a credit agreement is ineffective if not set forth in a writing that complies with Section 432.047.2, RSMo.
The Creditor Statue of Frauds is a relatively new development in Missouri law. Accordingly, it is often not considered by debtors and many creditors when considering modifications to loan/credit agreements. It is important to be aware of the writing requirement to avoid unintended consequences.
Contact with questions.