Both lenders and borrowers must understand this powerful tool.
In terms of commercial finance, the Illinois Credit Agreements Act, 815 ILCS 160/0.01, et seq., is an important law for both borrowers and lenders to understand when negotiating loan terms. The Illinois Credit Agreements Act (“Act”) was enacted in 1990 in response to concerns that borrower and lender litigation was plagued with frivolous claims and defenses by borrowers. The Illinois Statute of Frauds provided some limited protection against these claims and defenses because it requires contracts which cannot be performed within one year and oral agreements to act as a guarantor for another party’s debt to be in writing. However, borrowers could still assert claims and defenses based upon oral representations from a lender. The Act changed that.
The Act’s reach is broad in that it applies to any agreement or commitment by a creditor to lend money or extend credit, or delay or forbear repayment of money for commercial purposes. It ultimately provides protection for a lender because a borrower may not maintain an action on or in any way related to a credit agreement unless the credit agreement: (1) is in writing; (2) expresses an agreement or commitment to lend money or extend credit or delay or forbear repayment of money; (3) sets forth the relevant terms and conditions; and (3) is signed by the creditor and the debtor.
The Alleged Agreement
These requirements take on new significance in a world where interactions between lenders and borrowers can be entirely digital. For example, emails exchanged by attorneys for parties regarding a potential settlement agreement have been found to be insufficient to satisfy the requirements of the Credit Agreements Act.
In Vanpelt Construction Company, Inc. v. BMO Harris Bank, N.A., et al, the Illinois Appellate Court considered whether the Act barred debtors from asserting that email exchanges between their attorney and the lender’s attorney created a settlement agreement between the lender and debtors with respect to a mortgage foreclosure. In Vanpelt, the debtors borrowed money to purchase real estate and build a bank. They granted the lender a mortgage on the property, which secured two promissory notes. After failing to raise the necessary capital, the debtors defaulted on their loans.
The lender filed suit to foreclose on its mortgage. All of the debtors, except one, shared the same attorney, who negotiated via email with counsel for the lender to attempt to settle the matter. At one point in negotiations, it appeared the two sides had agreed to resolve the matter for a deed in lieu of foreclosure and a $350,000 cash payment, if the financial records of the guarantors proved they could not pay more. However, the lender moved forward to obtain a judgment of foreclosure and sale against the debtors. The debtors’ attorney believed that a settlement agreement had been reached previously, so the debtors filed a motion to enforce the alleged agreement. After hearing evidence regarding the negotiations, the trial court found that the agreement of the parties, through their respective counsel, constituted a binding settlement agreement.
Unenforceable Under the Act
On appeal, the Illinois Appellate Court found that the Act barred the settlement agreement. It found the purported agreement, which effectively modified an existing agreement by requiring the lender to forbear from exercising its remedies and right to repayment, is clearly the type of agreement encompassed by the Act. The Court further stated that the debtors clearly filed their motion to enforce the settlement agreement in defense of the lender’s actions seeking to enforce the mortgage documents, which are credit agreements.
After determining that the Act applied, the Court next considered whether an enforceable settlement agreement existed. It held that the emails exchanged did not contain the relevant terms of the agreement, such as the specific parties to be released, the specific property to be transferred in the deed in lieu, and a deadline for the parties to fulfill their obligations under the agreement. The Court stated that while the emails may have inferred these terms, “simply put, any unwritten understanding by the parties has no bearing on whether the Credit Act has been satisfied. Even when reading the emails together, the relevant terms cannot be found in those writings.”
In addition, the Appellate Court pointed out that the debtors failed to develop any arguments specifying where the signatures of the creditor and each debtor can be found in the emails—a requirement under the Act. It was undisputed that the purported terms of the alleged settlement agreement were contained within emails exchanged by attorneys for the parties, and that the lender, borrower and guarantors did not personally sign any of the emails. Ultimately, the Appellate Court found the agreement to be unenforceable under the Act.
As this case shows, the Illinois Credit Agreements Act is a powerful tool that both lenders and borrowers must understand when negotiating credit agreements, including potential settlement agreements. Any agreements or promises between a lender and a borrower must meet the strict requirements of the Act to be enforceable against the lender. iBi