BUSINESS LAW
Reproduced by permission. © 2007 Colorado Bar Association,
36 The Colorado Lawyer 31 (June 2007). All rights reserved.
The Colorado Credit Agreements Act
and Its Impact on Lenders and Borrowers
by Bruce A. Kolbezen and Samuel A. Evig
Business Law articles are sponsored
by the CBA Business Law Section to
apprise members of current substantive law. They focus on business law
topics for the Colorado practitioner,
including antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions,
franchising, nonprofit entities, securities law, and small business entities.
Article Editors:
David P. Steigerwald of Sparks Willson
Borges Brandt & Johnson, P.C., Colorado Springs—(719) 475-0097, dpsteig
@sparkswillson.com; Rob Fogler of
Kamlet Shepherd & Reichert LLP, Denver—(303) 825-4200, rfogler@ksrlaw.
com; Curt Todd of Lottner Rubin Fishman Brown & Saul, P.C., Denver—
(303) 383-7676, [email protected]
(Bankruptcy Law)
About the Authors:
This article analyzes case law construing the Colorado
Credit Agreements Act (Statute), from its enactment in 1989
through the most recent decision by the Colorado Court of
Appeals. This body of case law has uniformly expanded the
reach of the Statute. The scope of the Statute demands the
attention of institutional lenders, their borrowers, and
counsel who represent them.
T
he Colorado Credit Agreements
Act1 (Statute) provides that neither a lender nor a borrower may
rely on the oral representations of the
other in the context of credit agreements.
The majority of case law under the
Statute involves cases where a lender
seeks to defeat claims by its borrower
based on oral representations of the
lender. However, the Statute is bilateral,
notwithstanding its lender-oriented legislative history.2 Consequently, the statutory shield against claims based on oral
representations operates to protect borrowers, as well as lenders. The purpose
of this article is to provide context for the
Statute, to describe the Statute and its
reach, to analyze important decisions
construing the Statute, and to provide
drafting suggestions for practitioners.
History of the Statute
Bruce A. Kolbezen is a partner at Sherman & Howard L.L.C. He specializes
in real estate law and real estate lending, and related commercial law matters—(719) 448-4030, bkolbezen@sah.
com. Samuel A. Evig is an associate at
Sherman & Howard L.L.C. His practice includes general real estate matters—(303) 299-8494, [email protected].
The Colorado legislature enacted the
Statute in 1989, at the end of a financial
institution crisis that included rising interest rates, changes to federal tax law,
and an overextension of credit, all of
which contributed to instability in the
lending industry.3 During this time, borrowers frequently asserted claims and
defenses against lending institutions
based on undocumented oral representations and promises made by lenders,
such as a lawsuit based on an oral promise to extend the term of a loan.4
As a preemptive measure against potential lawsuits based on oral promises,
the Colorado legislature enacted the
Statute. The specific intent of the legislature was to “curtail suits against
lenders based on oral representations
made by members of the credit industry.” 5
The Statute’s Provisions
The operative provisions of the
Statute preclude any debtor or creditor
from filing or maintaining an action or a
claim relating to a credit agreement in
excess of $25,000 if the credit agreement
is not in writing and is not signed by the
party against whom enforcement is
sought. In addition, and unlike other
statutes of frauds, the Statute abrogates
common law exceptions to its application based on performance, partial performance, and promissory estoppel.6
For the Statute to apply to a given situation, there must be: (1) a credit agreement; (2) a debtor; and (3) a creditor. The
Statute’s definition of these terms is discussed below.
Credit Agreement
A “credit agreement” is defined in
CRS § 38-10-124(1)(a) as:
(I) A contract, promise, undertaking,
offer, or commitment to lend, borrow,
repay, or forebear repayment of money, to otherwise extend or receive cred-
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32
it, or to make any other financial accommodation;
(II) Any amendment of, cancellation of,
waiver of, or substitution for any or all
of the terms or provisions of any of the
credit agreements defined in subparagraphs (I) and (III) of this paragraph
(a); and
(III) Any representations and warranties made or omissions in connection with the negotiation, execution, administration, or performance of, or collection of sums due under, any of the
credit agreements defined in subparagraphs (I) and (II) of this paragraph (a).
In deference to the legislative intent,
courts have broadly interpreted the definition of credit agreement. The cases construing the Statute make it clear that oral
promises to make loans, oral promises to
forebear from foreclosing, and settlement
agreements regarding the collection of
debts are credit agreements.7
Actions or Claims Related
to Credit Agreements
The Colorado Supreme Court case of
Univex Int’l, Inc. v. Orix Credit Alliance,
Inc.8 illustrates how expansively the
Statute has been applied. This case involved a struggling company run by
Robert and Mary Rose (Rose), which offered to sell equipment to a rival company, Univex. The equipment was encumbered by a lien in favor of Rose’s lender,
Orix. The parties verbally agreed that
Orix would acquire the equipment from
Rose by voluntary repossession, then sell
the equipment to Univex and provide financing to Univex for the purchase. The
parties never signed any paperwork, but
did exchange drafts of documents. Univex
delivered a security deposit to Orix. Rose
sold the equipment to a third party for the
amount outstanding on the loan. Univex
subsequently sued Rose and Orix.
The Colorado Supreme Court held that
the Statute precluded enforcement of the
oral agreement by Orix to sell the equipment to Univex, because that purchase
and sale agreement was “related” to
Orix’s oral “credit agreement” to provide
financing. The Court determined that the
oral agreement regarding financing was
an unenforceable credit agreement under
the Statute. Based on that determination, the Court held that the related
agreement for the purchase and sale of
the equipment also was unenforceable
under the Statute.
The Univex case illustrates the broad
reach of the Statute. Under the Univex
analysis, any commercial transaction that
includes even a tangential financing component can be determined, in its entirety,
to be “related” to the credit agreement. If
the credit agreement component of the
transaction is unenforceable under the
Statute, the primary related transaction
can be rendered unenforceable, as well.9
Creditors and Debtors
The Statute defines “creditor” as a “financial institution.” The Statute defines
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June
“financial institution” as a “bank, savings
and loan association, savings bank, industrial bank, credit union, or mortgage or finance company.” 10 The Statute does not
extend to noninstitutional lenders. A
“debtor” under the Statute is a “person
who or entity that obtains credit or seeks
a credit agreement with a creditor or who
owes money to a creditor.”
Although the presence of both a creditor and a debtor is required for the existence of a “credit agreement,” the application of the Statute is not limited to claims
directly between the creditor (lender) and
debtor (borrower). The Colorado Supreme
Court, in Schoen v. Morris,11 held that oral
representations by one lender (a bank) to
another lender (an individual), when the
two lenders shared a common borrower,
constituted an unenforceable credit agreement under the Statute.
In Schoen, the first lender made a loan
to the borrower for the construction of a
dance hall and saloon. The proceeds of the
loan were insufficient to complete construction. The second lender made several
bridge loans to the same borrower for payment of construction vendors, allegedly
based, in part, on the first lender’s oral
representations to the second lender that
a permanent loan had been approved by
the first lender and would be funded in an
amount sufficient to repay the bridge
loans. The permanent loan was never
made, and the borrower filed for bankruptcy protection. The second lender sued
the first lender based on the oral representations.
The Colorado Supreme Court held that
the oral representations made by the first
lender to the second lender (“a commitment to lend”) constituted a credit agreement under the Statute. Further, the
Court held that the first lender was a
creditor (“a financial institution which offers to extend . . . credit”) and the second
lender was a debtor (“a person who . . .
seeks a credit agreement”) under the
Statute, despite the absence of a direct
lender-borrower relationship between
them. Consequently, the claims based on
oral representations by the first lender to
the second lender regarding the extension
of credit to a common borrower were
barred by the Statute.
As a result of Schoen, all inter-creditor
agreements, including tri-party, participation, buy-sell, and subordination agreements, must be in writing and signed to
be enforceable. Also, all modifications to
such agreements must be in writing and
signed to be enforceable.
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33
Claims to Which the
Statute’s Shield Applies
Most cases under the Statute involve
fact patterns where lenders seek to defeat
claims by borrowers based on actual or alleged oral promises to provide credit, modify an existing loan, or forebear from foreclosing or otherwise enforcing a defaulted
loan. In such cases, lenders assert the
Statute as a shield to protect their interests. However, the operative language of
the Statute states that “no debtor or creditor may file or maintain an action or a
claim relating to a credit agreement.” 12
Thus, the statutory shield operates to protect both lenders and borrowers; oral representations and promises by a borrower
related to credit agreements are unenforceable by the lender. Premier Farm
Credit, PCA v. W-Cattle, LLC,13 discussed
below, involves the use of the Statute as a
shield by both the lender and the borrower against the other’s claims.
Further, the Statute has been found to
bar many types of claims.These claims include unjust enrichment,14 breach of fiduciary duty, outrageous conduct, interference with prospective business advantage,15 and negligent misrepresentation.16
The Premier Decision
Premier is the most recent case involving the Statute. The facts of Premier are
similar to those of many cases involving
the Statute—the borrower tried to prevent the lender from taking action to collect defaulted loans based on an alleged
oral assurance given by the lender.
Facts and Background
The borrower and the lender had established a relationship in 1998. During the
initial loan application process, the borrower materially misrepresented its financial position. Unaware of the misrepresentation, the lender provided a $6 million revolving line of credit, secured by
pledges of cattle, farm machinery, feed
grain, equipment, and crops. The parties
documented the loan by signing standard
loan documents, which required the borrower to submit monthly “borrowing
base” reports listing cattle inventory, crop
inventory, and facts about other assets.
Each year during the term of the loan
and in reliance on the accuracy of information contained in the monthly borrowing base reports, the lender increased the
amount available for disbursement under
the line of credit. In 2003, concerns about
the actual value of its collateral prompted
the lender to include new reporting requirements in the loan agreement and,
later, to perform an on-site audit of the collateral.
After the on-site audit, which indicated
the borrower had been misrepresenting
its position, the lender’s president met
with the borrower to discuss the discrepancy. The borrower claimed to have received assurance from the president that
the lending relationship would continue
and that loans would not be called due. In
reliance on these alleged verbal assurances, the borrower executed deeds of
trust on all of its real property as additional security for the existing loan. The
parties did not memorialize the alleged
promise by the president to forebear from
calling the loan due.
The next borrowing base report established that the borrower owned cattle
worth approximately $11 million less
than the most recent report had claimed.
The lender filed suit against the borrower
for breaches under the loan documents,
fraudulent misrepresentation, fraudulent
concealment, and conversion of collateral.
The lender sought damages, turnover of
personal property collateral, an account-
ing, appointment of a receiver, and foreclosure of the recently granted deeds of trust.
Importantly, the lender’s fraud claims
were based on its allegation that the borrower had misrepresented its financial
status in the application process for the
original loan in 1998.
The borrower responded by asserting
defenses and counterclaims, including
claims of fraud, breach of contract, negligence, breach of fiduciary duty, and by requesting a declaration that the deeds of
trust executed in 2003 were void as having been fraudulently induced. The borrower’s core allegation was that the
lender’s president had deceived the borrower by his oral representations that the
lender would not call the loan due, thereby inducing the execution of the deeds of
trust by the borrower.
Trial Court Ruling
The trial court held that the borrower
could not assert claims, including the
claim for rescission of the deeds of trust,
because of fraud in the inducement. The
court also held that the borrower could
not introduce evidence based on the
lender’s oral promise to forbear repay-
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34
ment of money, because the oral promise
was an unwritten and unsigned credit
agreement and, therefore, unenforceable
under the Statute. Similarly, the trial
court held the lender could not assert
claims or introduce evidence based on the
borrower’s oral representations made in
connection with the negotiation of the
lender’s commitment to lend money in
1998, because the oral representations
were an unenforceable credit agreement
under the Statute.
Appellate Decision
The Colorado Court of Appeals affirmed
the decision of the trial court. Particularly, the majority of the Court of Appeals
concluded that the phrase “action or
claim” in the Statute is not limited to
claims for affirmative recovery, but also is
intended to bar the assertion of affirmative defenses to liability based on oral misrepresentations. Consequently, the majority held that the borrower’s claim for
rescission of the deeds of trust based on
the theory of fraudulent inducement were
barred by the Statute.17
The Premier case illustrates two points.
First, the Statute precludes claims based
on the borrower’s alleged fraudulent oral
misrepresentations at the outset and during the lending relationship. Second, the
Statute defeats a claim to rescind a credit
agreement based on fraud in the inducement.
Implications for
Institutional Lenders,
Borrowers, and Counsel
Based on Univex, parties to transactions that are related to a credit agreement should exercise caution. A large
number of business transactions involve
a credit agreement that is not the primary
focus of the transaction. Parties involved
in the transaction must be aware of the
consequences of the Statute’s application
to their particular transaction and document the transaction accordingly.
Under Premier, the Statute will operate
to defeat claims for fraud in the inducement based on oral misrepresentations by
either a lender or a borrower. However,
notwithstanding Premier and the statutory bar, it is important to remember that a
lender typically will have recourse under
its promissory note against its borrower,
34 / The Colorado Lawyer / June 2007 / Vol. 36, No. 6
June
as well as recourse under its security documents against the collateral securing the
repayment obligation. Consequently, a
fraud claim, like that made in Premier by
the lender, absent additional punitive
damages, would not add to the lender’s
contractual rights to recovery under its
loan documents.18 On the other hand, the
Statute provides the lender with a defense to fraud claims asserted against it
by its borrower based on the lender’s alleged or real oral misrepresentations.
Therefore, on balance, the decision is favorable to lenders.
Nonetheless, in light of the holding in
Premier, some general revisions to loan
documents should be considered. Particularly, in the context of nonrecourse lending, revisions to the “fraud and misrepresentation carve-out” also should be considered. In addition, lenders may wish to
implement certain strategies in anticipation of a borrower’s potential bankruptcy.
Loan Documentation Revisions
To make otherwise unsigned pre-closing due diligence documentation and
post-closing loan administration reports
enforceable under the Statute, the lender
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2007
reasonably might require that such documentation and reports be certified on behalf of the borrower. The requirement for
the certificate would be included in the
loan application form for the borrower.
(See “Certificate” example in accompanying sidebar.) Further, any significant oral
representations by the borrower or its
representatives made to the lender in the
loan application and underwriting process
should be reduced to writing and certified,
as suggested above, or incorporated in the
loan documentation.
In addition, general representations
concerning the accuracy and completeness of information contained in and related to the loan application and commitment should be included in the loan documentation. (See “Representations of
Accuracy” example in accompanying sidebar.) A default provision corresponding to
the general representations would be included in the definition of “Events of Default.” (See “Default” example in accompanying sidebar.)
35
Related boilerplate provisions of existing loan documents should be critically reviewed. Particularly, integration provisions, by which prior agreements are
merged into the loan documents and
thereby superseded, should be removed.
Indeed, the operation of the Statute addresses, in significant part, the institutional lender’s concerns that gave rise to
the inclusion of such integration provisions in loan documentation. A conflicts
provision should be substituted for the integration provision. Under the conflicts
provision, the terms and conditions of the
loan documents would supersede any inconsistent terms and conditions of the
loan commitment, but the loan commitment and the reports, certificates, lists,
and other instruments, described above,
otherwise would survive the execution
and delivery of the loan documents.
Importantly, the “fraud or misrepresentation recourse carve-out” in any nonrecourse provisions of the applicable loan
documents should be reviewed and re-
vised if necessary. If, as a result of fraud or
misrepresentation, the value of the collateral has been significantly overstated, the
lender must have personal recourse
against the borrower and guarantors. In
light of the Premier decision, the fraud or
misrepresentation carve-out should be
cast as a contractual undertaking by the
borrower. (See “Fraud or Misrepresentation Carve-Out” example in accompanying sidebar.) If obtainable, the lender
should include a provision giving the
lender full recourse against the borrower
and guarantors in the event of fraud or
misrepresentation.
Bankruptcy Implication
and Strategy
In bankruptcy court, a creditor seeking
a determination that a debt, evidenced by
a promissory note, is nondischargeable
under 11 U.S.C. § 523(a)(2)(A) must prove
that: (1) the debtor made representations;
(2) at the time of making the representations, the debtor knew they were false; (3)
Loan Documentation Revisions: Example Language
Certificate
The following is an example of a form of certificate that might be required:
The undersigned certifies (a) that the undersigned is an [officer/partner/member] of [Borrower] with responsibility for the matters discussed
and described herein; (b) that the undersigned has reviewed all information contained herein and certifies that it is accurate and complete,
and does not omit any material facts; (c) that it is the intent of the [Borrower] that [Lender] shall rely on all the information contained herein in
underwriting, making, and administering the loan from [Lender] to [Borrower]; and (d) that the undersigned has been fully authorized to give
this certificate by [Borrower].
Name: _____________________________
Title: _______________________________
Date: ______________________________
Representations of Accuracy
The following are examples of such representations with respect to a real estate loan:
Representations in Commitment and Otherwise. The representations
made in connection with the Commitment, including but not limited to
the type of development, income, and expenses of the Real Property,
the Leases, and the financial condition and credit of Borrower, are as
represented in the Commitment in all respects, except any changes that
may have been approved by Lender in writing. In addition to the foregoing, all financial and other information and statements relating to Borrower, any Guarantor, and/or any of the Real Property that has been previously supplied to Lender by Borrower, are true, complete, and correct
in all material respects and have been prepared in accordance with generally accepted accounting principles, consistently applied.
Complete Information. No representation or warranty of Borrower or any
Guarantor contained in any of the Loan Documents or Guarantor Documents; no statement of Borrower or any Guarantor contained in any re-
port, certificate, schedule, list, financial statement, side letter, or other
instrument furnished to Lender by or on behalf of Borrower or any Guarantor; and, to the best knowledge of Borrower, no statement of any person or entity other than Borrower or any Guarantor contained in any report, certificate, schedule, list, financial statement, side letter, or other
instrument furnished to Lender by or on behalf of Borrower or any Guarantor, contains any untrue statement of a material fact, or omits to state
a material fact necessary to make the statements contained therein not
misleading in any material respect.
Default
The following is an example of a default provision with respect to a real
estate loan:
Misrepresentations. Any representation or warranty made by Borrower
or any person(s) or entity(ies) comprising Borrower or any guarantor(s)
under the loan application or Loan Documents or any report, certificate,
schedule, list, financial statement, side letter, or other instrument furnished to Lender at any time in connection with the loan application, the
Loan, or the Loan Documents proves to be untrue or misleading in any
material respect.
Fraud or Misrepresentation Carve-Out
The following is an example of such a carve-out:
The Borrower hereby absolutely and unconditionally agrees to pay, indemnify, and hold the Lender harmless from and against any and all
damage, loss, liability, cost, and expense, including, without limitation,
reasonable attorney fees and costs, plus default interest thereon, which
Lender may suffer or which Lender may become subject to, directly or
indirectly, arising out of, resulting from, or based on any fraud or misrepresentation by Borrower or by any of Borrower’s guarantors to Lender
prior to or during the term of the Loan, and irrespective of whether such
fraud or misrepresentation is itself actionable under the Colorado Credit
Agreements Act, CRS § 38-10-124, or otherwise.
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the debtor made them with intention and
purpose of deceiving the creditor; (4) the
creditor relied on such representations;
and (5) the creditor sustained loss or damage as proximate result of representations
having been made. The determination of
the dischargeability of a debt in bankruptcy is a matter of federal law. Therefore, the Statute and the Premier case
should not have significance with respect
to the borrower’s bankruptcy and the
lender’s claim of nondischargeability of its
debt based on false pretenses, false representations, or actual fraud under Bankruptcy Code § 523(a)(2)(A). Although the
doctrine of collateral estoppel, or issue
preclusion, does apply in bankruptcy
court, an earlier state court determination
that a claim for oral fraud is barred by the
Statute should not affect a bankruptcy
court’s subsequent determination regarding the dischargeability of the debt evidenced by a promissory note or a judgment entered thereon.
Generally, as long as Premier remains
good law, it would not be productive for a
creditor to litigate, in state court, a fraud
claim against the borrower based on oral
misrepresentations relating to a credit
agreement. However, in a case where default judgment is likely to be entered in
state court, creditor’s counsel might consider inclusion of allegations of fraud in
the lender’s complaint that, on entry of default judgment, could satisfy the factual
predicates to nondischargeability.
Conclusion
The lessons from Colorado state court
decisions regarding the Statute are
twofold. First, case law confirms that the
Statute is expansive and, for the first
time, the Statute has been found to preclude claims of fraud in the inducement
based on oral misrepresentations.
Second, drafting loan documents with
care and attention to the details of the
particular transaction is critical.Although
the facts regarding loan documentation in
Premier are sketchy, the case might have
turned out differently had either of the
parties focused closely on documentation
during the loan application and underwriting process and the subsequent loan
administration process.
The use of standard form loan documents is acceptable for many transactions
and usually will have the added effect of
lowering transaction costs. However, in
transactions of sufficient size or complexity, the inclusion in loan documents of specific representations and warranties and
complementary default and indemnification provisions will prove valuable to the
lender. Further, in most transactions involving large loan amounts or increased
complexity, the marketplace will accept
the increase in cost attendant to more
thoughtful loan documentation.
NOTES
1. CRS § 38-10-124.
2. See Schoen v. Morris, 15 P.3d 1094, 109899 (Colo. 2000), citing Recordings of the House
Business Affairs Committee on H.B. 11-161989, 57th General Assembly (Jan. 19, 1989).
3. See Federal Deposit Insurance Corporation Division of Research, “History of the
Eighties—Lessons for the Future” (1997),
available at http://www.fdic.gov/bank/histor
ical/history.
4. See Smith v. Hoyer, 697 P.2d 761 (Colo.
App. 1984) (damages recovered by borrower
based on bank’s breach of an oral agreement to
extend term of loan).
5. See Schoen, supra note 2 at 1098.
6. CRS § 38-10-124(2) and (3).
7. See Schoen, supra note 2; Hewitt v. Pitkin
County Bank and Trust Co., 931 P.2d 456 (Colo.
App. 1995); Pima Financial Serv. Corp. v. Selby, 820 P.2d 1124 (Colo.App. 1991).
36 / The Colorado Lawyer / June 2007 / Vol. 36, No. 6
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8. Univex Int’l, Inc. v. Orix Credit Alliance,
Inc., 914 P.2d 1355 (Colo. 1996).
9. Id. at 1361. The dissent observed that:
[T]he effect of the rule announced by the
majority is to render any commercial transaction allegedly containing “financing”
terms a “credit agreement” in its entirety
regardless of the nature or extent to which
the agreement addresses “financing issues”
or how incidental such issues might be to
the primary transaction.
10. The term “bank,” which is included in the
definition of “financial institution,” has been
construed broadly to mean both state and federally chartered banks and institutions that
function like banks by accepting deposits, allowing withdrawal of funds by check or draft,
making loans, and accepting security for loans.
Premier Farm Credit, PCA v. W-Cattle, LLC,
No. 05CA0444 (Colo.App. 2006), cert. denied
(April 9, 2007).
11. Schoen, supra note 2.
12. CRS § 38-10-124(2).
13. Premier, supra note 10.
14. Lang v. Bank of Durango, 73 P.3d 1121
(Colo.App. 2003).
15. Hewitt, supra note 7.
16. Norwest Bank Lakewood v. GCC Partnership, 886 P.2d 299 (Colo.App. 1994).
17. Id. The Court of Appeals opinion contained a special concurrence by Judge Carparelli. In Judge Carparelli’s opinion, the Colorado
Credit Agreements Act (Statute) does not defeat a common law defense (such as fraud in
the inducement), because the Statute, by its
terms, applies only to “an action or a claim.”
Judge Carparelli found that the result reached
by the majority nonetheless was correct, because the fraud claims by W-Cattle and the
Wisdoms were based on Premier’s alleged misrepresentations about its future plans, as opposed to concealment or failure to disclose past
or present facts. Although the Colorado Supreme Court denied cross petitions for certiorari in this case, it remains to be seen whether
Judge Carparelli’s position will be adopted by
the Court in the future.
18. In addition, because a lender will have
contractual remedies against its borrower under the loan documents, it is questionable
whether, under the economic loss rule, a fraud
claim, which is a claim in tort, may be asserted
by a lender against its borrower. The rationale
of the economic loss rule is to separate the law
of contracts, under which the duties and obligations of parties are determined by their mutual agreement, from the law of torts, under
which duties and obligations are determined
by social policy. The operation of the economic
loss rule prevents a commercial plaintiff from
recovering excessive damages for losses based
on tort theories of liability, when contract or
commercial law would more accurately calculate the remedy based on the agreement of the
parties. See Lawler, “Independent Duties and
Colorado’s Economic Loss Rule—Part 1,” 35
The Colorado Lawyer 17 (Jan. 2006). ■