Summary of a Recent
Judicial
Development in
Secured Transactions
Credit Agreement Statute of Frauds Bars Debtor's Claim
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Premier Farm Credit, PCA v. W-Cattle, LLC, 155 P.3d 504 (Colo. App. 2006), the Colorado Court of Appeals held that the Colorado credit agreement statute of frauds barred the defendants' counterclaim because the alleged misrepresentation that was the basis of the claim was oral rather than in writing.
Background
The Defendants obtained operating loans from Premier Farm Credit (PFC) using false information in their financial statements, and they also failed to disclose an existing liability to another lender. Id. at 508. They pledged cattle, grain, farm machinery, equipment, and crops as collateral. Id. PFC extended a line of credit to the Defendants, increasing each year for several years based on financial statements submitted periodically by the Defendants. Id. After about 5 years, PFC started to notice discrepancies between the actual value of the Defendants' collateral and the value reported in the monthly borrowing reports, but in 2003 they executed a new loan agreement with the Defendants. Id. at 509. The Defendants subsequently agreed to allow PFC to conduct an onsite audit of the collateral, which revealed that they owned far fewer cattle than they had claimed in their financial statements. Id. PFC concluded that the Defendants had been using loan proceeds for purposes other than those allowed under the loan agreements, and had misrepresented the value of their collateral. Id. The Defendants mortgaged their real estate to add value to their collateral, and later submitted an updated balance sheet which showed a huge discrepancy in the value of their cattle, valued at several million dollars less than they had originally claimed. Id. PFC filed suit against the Defendants for breach of the promissory note, fraudulent misrepresentation, fraudulent concealment, and conversion of collateral. Id. at 509-10. The Defendants filed counterclaims for fraud, breach of contract, negligence, and breach of fiduciary duty and for a declaratory judgment that the mortgages were voId. Id. at 510. They claimed that PFC's president deceived them into agreeing to the mortgages in hopes that their borrowing relationship with PFC would continue. Id. PFC also filed a foreclosure action which was combined with the other litigation. Id. The trial court held in favor of PFC on its breach of promissory note claim, and dismissed the Defendant's claims, and the Defendants appealed. Id.
Arguments
The Defendants argued that C.R.S. § 38-10-124, the credit agreement statute of frauds, did not apply because PFC was not a "creditor" or "bank" for purposes of the statute, or alternatively that the statue did not apply to fraudulent inducement claims. Id. at 513-14.
Analysis and Holdings
The court affirmed the trial court's ruling and held that the credit agreement statute of frauds, C.R.S. § 38-10-124, barred the Defendant's claims regarding the PFC president's alleged promise to forbear. Id. at 512-13. The statute states that "no debtor or creditor may file or maintain an action or a claim relating to a credit agreement involving a principal amount in excess of twenty-five thousand dollars unless the credit agreement is in writing and is signed by the party against whom enforcement is sought." Id. at 513. Since the alleged promise was oral and nothing was put into writing, the court held that it could not be asserted as a basis to rescind the mortgages. Id. at 516. The court rejected the Defendants' other defenses, including lack of consideration for the mortgages, duress, and equitable estoppel. Id. at 520-22. The court dismissed the rest of their third-party claims also, affirming the holdings of the trial court. Id. at 522-23.
The case was decided on October 5, 2006.