Wisconsin recently joined the majority of states (including Illinois, Minnesota, Iowa, Nebraska, Kansas, Colorado, Washington, Florida, California, Texas and others) that have required credit agreements to be in writing in order to be enforceable. Wisconsin Stat. §241.02(3) took effect on December 18, 2015, creating more certainty in credit transactions and reducing lender liability claims against financial institutions. The law applies to any court actions brought after December 17, 2015.
What is the purpose of the new law?
Borrowers and lenders routinely engage in oral discussions to outline the parameters of new financing transactions, an amendment to an existing credit transaction, or a workout of a credit default prior to preparing and signing formal documents to memorialize these discussions. Further, lenders quite often use unsigned term sheets to summarize such discussions. When a proposed financing, modification, or workout plan does not successfully close as the borrower anticipates, the lender may be facing a claim that it promised to make a loan or other financial accommodation, despite the lender’s best efforts to prevent misleading the borrower or create misunderstandings between the lender and borrower along the way.
To address these potential misunderstandings between borrower and the lending institution, the Wisconsin legislature enacted the new statute to help protect lenders against claims by borrowers for breach of a promise or oral commitment to extend credit or modify the terms of an existing credit transaction when those terms have not been documented in a writing signed by the lender.
Who does Wis. Stat. §241.03 cover?
Wisconsin Stat. §241.02(3) applies to financial institutions and their affiliates, including any state or federally chartered banks, savings banks, savings and loan associations, credit unions and farm credit institutions. Affiliates of these entities include business institutions that control, are controlled by, or under common control with the financial institutions.
What actions does the law prohibit?
The new law precludes legal actions against financial institutions and their affiliates on or in connection with offers, promises, agreements or commitments to do any of the following unless certain criteria are met: (1) lend money; (2) grant or extend credit or make any other financial accommodation, and (3) renew, extend, modify or permit a delay in repayment, or performance of a loan, extension of credit, or other financial accommodation.
However, actions on these types of offers, promises, agreements or commitments are allowed if the following criteria are met: (1) the offer, promise, agreement or commitment is in writing; (2) the writing sets forth the relevant terms and conditions of the financial transaction; (3) the writing is signed with an authorized signature by the financial institution and its affiliate; and (4) the writing is delivered to the borrower seeking to enforce the offer, promise, agreement or commitment.
The law specifically prohibits the enforcement of these types of unwritten offers, promises, agreements or commitments using the legal doctrine of promissory estoppel. Promissory estoppel allows a claimant to enforce a promise that has not been reduced to a written and signed contract. It requires three elements of proof: (1) a promise or offer is made that the promisor or offeror reasonably should expect to induce action or forbearance of a definite and substantial character by the promisee or offeree; (2) the promise or offer induced such action or forbearance; and (3) injustice would be avoided only by enforcing the promise. Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 698, 133 N.W.2d 267 (1965).
How is the new law limited?
The new statute is self-limiting by its own terms because:
- It does not apply to credit transactions subject to the Wisconsin Consumer Act, (Wis. Stat. §§421-427).
- It does not apply to any offer, promise, agreement or commitment in connection with the issuance of a credit card (as defined in Wis. Stat. §421.301(15)), whether or not subject to the Wisconsin Consumer Act.
- It does not preclude any action or claim for fraudulent representation under Wis. Stat. §100.18 (which broadly prohibits untrue, deceptive or misleading advertising claims, as well as certain specified misrepresentations).
- It does not preclude any action or claim for fraudulent misrepresentation under common law.
How should lenders best proceed?
Lenders should continue to use caution in their discussions with borrowers in order to avoid misunderstandings, if and when possible. Lenders also should put in place procedures to ensure that conversations with borrowers are appropriately documented in the event that a claim of fraudulent representation or fraudulent misrepresentation is later brought against the lending institution.
Please give me a call at 920-851-776, or email me with questions about this new law or other banking or lending issues at firstname.lastname@example.org.