The Iowa Supreme Court, in County Bank v. Shalla, unanimously held that Iowa Code section 535.17 bars negligence and fraud claims against banks. The decision was premised upon the Iowa credit agreement statute of frauds, which provides that a “credit agreement,” including all terms of that agreement, “is not enforceable in contract law by way of action or defense by any party unless a writing exists which contains all of the material terms of the agreement.” The specific question before the Court was whether the statute bars unwritten terms of an unwritten credit agreement to obtain financing to exercise an option to purchase real property.
Clint Shalla approached Peoples Bank president Christopher Goerdt to obtain financing to allow Shalla to exercise an option. When the option was not timely exercised, Shalla had to pay more to buy the land that had been covered by the option. Shalla borrowed those funds from County Bank, the bank that Goerdt had moved to while Shalla and Goerdt were working together. After the loan closed, it was learned that Goerdt had engaged in fraudulent activities, including activities relating to the Shalla loan, leading to Goerdt’s ultimate indictment and guilty plea. In the meantime, Shalla defaulted on the debt, leading County Bank to foreclose. Shalla counterclaimed and brought third-party claims against Peoples Bank and Goerdt, including claims for negligence and fraud, arising from Goerdt’s alleged oral agreement to obtain financing for and help Shalla exercise the option. The district court ultimately agreed with Peoples Bank that Section 535.17 barred the negligence and fraud claims, and Shalla appealed.
The Iowa Supreme Court began with the relevant Code provisions: “A credit agreement is not enforceable in contract law by way of action or defense by any party unless a writing exists which contains all of the material terms of the agreement and is signed by the party against whom enforcement is sought.” A “credit agreement” is “any contract made or acquired by a lender to loan money, finance any transaction, or otherwise extend credit for any purpose, and includes all of the terms of the contract.” A “contract” is a “promise or set of promises for the breach of which the law would give a remedy or the performance of which the law would recognize a duty, and includes promissory obligations based on instruments and similar documents or on the contract doctrine of promissory estoppel.”
The threshold question was whether Shalla’s claims for negligence and fraud involve a “credit agreement” as defined in the statute. Shalla admitted he approached Goerdt to secure financing. Given the broad definition of the terms credit agreement and contract, the Court had “little trouble concluding that Goerdt’s promise or promises to the Shallas to assist them in obtaining financing to exercise the option was a credit agreement within the meaning of the statute.”
Shalla argued that Goerdt made a separate promise, outside of the statute of frauds, to help exercise the option in addition to providing financing. The Court disagreed. “Contract” is broadly defined to include any “promise or set of promises,” plural. Any additional promise Goerdt made to represent or assist the Shallas in connection with exercising the option was part of a single transaction—to obtain financing to exercise the option. “A credit agreement is not limited to just the terms of the loan or financing but includes ‘all of the terms of the contract.’ The Shallas cannot slice up the terms of a single credit agreement into multiple promises to evade the statute of frauds.”
The Court then disagreed with Shalla’s interpretation of a different statutory phrase; specifically, the Code states, “a credit agreement is ‘not enforceable in contract law by way of action or defense.’” Shalla argued the wording meant that his tort claims could continue.
The Court disagreed. “The legislature provided explicit guidance to courts in the application of this statute: ‘This section shall be interpreted and applied purposively to ensure that contract actions and defenses on credit agreements are supported by clear and certain written proof of the terms of such agreements to protect against fraud and to enhance the clear and predictable understanding of rights and duties under credit agreements.’” Allowing parties to “repackage” contract claims as tort claims would undermine “the clear and predictable understanding of rights and duties under credit agreements,” and would dilute the Code’s provisions. The Shallas’ claims for negligence and fraud were “repackaged” contract claims.
The Court’s application of the credit agreement statute of frauds should help protect banks from liability to borrowers and third parties when the underlying credit agreement and related promises have not been reduced to writing. Not only is such approach consistent with legislative policy, but the approach also should help improve the efficiency of the dispute resolution process, as only written credit agreements should be allowed to advance.