Lesson. Lenders, particularly those that are not conventional banks, should proceed carefully when entering into and executing upon loan modification or workout discussions. An innocent or well-intended email or phone call could come back to haunt you.

Case cite. SWL v. Nextgear, 131 N.E.3d 746 (Ind. Ct. App. 2019)

Legal issues. Whether a “floor plan” finance company was entitled to summary judgment on the borrower’s defenses, which were (1) that the lender modified its loan or (2) was otherwise barred from enforcing the default based upon promissory estoppel.

Vital facts. Plaintiff lender and defendant borrower, a car dealer, entered into a promissory note and security agreement in which the lender agreed to extend a revolving line of credit to the borrower. The borrower used the money to buy vehicles at auctions. As part of the financing arrangement, the parties agreed to a payment schedule detailing, among other things, the money the borrower was required to repay for each vehicle it purchased with the lender’s funds.

At some point, the borrower became delinquent on its payments, and the parties began discussing how to proceed. On the one hand, there was evidence that the borrower’s plan was to liquidate its inventory and pay off the loan. On the other hand, there was evidence, primarily in the form of an email exchange, in which a representative of the lender pushed for and stipulated to a plan to salvage the relationship. The borrower claimed that, in reliance on the email exchange, it made a couple more payments in an apparent effort to pay down the loan and continue the lending relationship. Something broke down, however, causing the lender to repossess the borrower’s remaining vehicles and file suit to collect the balance owed on the loan.

Procedural history. The lender filed a breach of contract action. The borrower asserted the defenses of modification and promissory estoppel. The trial court granted the lender’s motion for summary judgment, and the borrower appealed.

Key rules.

    Oral modification. Despite language in a contract expressing that it can only be modified by written consent, a contract “may nevertheless be modified orally.” Moreover, modification “can be implied from the conduct of the parties.” Intent is what matters – the parties’ “outward manifestations of it” or, in other words, “the final expression of that intent found in conduct” as opposed to one’s subjective intent.

    Promissory estoppel. The doctrine provides that, where parties believed they had a contract but in fact did not, equity applies to hold the parties to their representations to each other. To demonstrate that the doctrine of promissory estoppel applied in SWL, the borrower was required to show:

(1) a promise by the promissor; (2) made with the expectation that the promisee will rely thereon; (3) which induces reasonable reliance by the promisee; (4) of a definite and substantial nature; and (5) injustice can be avoided only by enforcement of the promise.

In SWL, the “promissor” was the lender, and the “promisee” was the borrower.

As an aside, please note that Indiana's Lender Liability Act did not apply to this case because the plaintiff lender in SWL was not a conventional bank.  For more, click on the Related Posts below.

Holding. The Indiana Court of Appeals reversed the summary judgment in favor of the lender and remanded the case for trial.

Policy/rationale. First, it’s important to remember that SWL was a summary judgment case, not a trial. Issues of fact, mainly surrounding the modification discussions and the parties’ intent, prevented a pretrial judgment for the lender. If the case were tried, the lender still could prevail.

With regard to the modification issue, the borrower designated evidence to raise a genuine issue of material fact concerning whether the lender intended to modify the terms of the promissory note when the lender’s rep spoke with the borrower’s rep and sent the email. “Because the parties' conduct is subject to more than one reasonable inference, we cannot say as a matter of law that the parties did not modify the Contract.”

As to the promissory estoppel matter, the lender keyed in on the legal requirement that the alleged promise must be of a “definite and substantial nature.” The borrower had in fact been in default on vehicles other than those addressed in the fateful email at the heart of the case. However, the borrower’s affidavit in opposition to the summary judgment motion raised questions surrounding the matter of default. The Court reasoned:

[The borrower’s] affidavit is sufficient evidence to create a genuine issue of material fact concerning whether [the borrower] was in default when [the lender sent] the February email. And even if [the borrower] were in default as of February 24, 2016, the designated evidence suggests that, because [the borrower] had a “lengthy impeccable history,” [the lender] proposed a course of action to cure any default and for [the borrower] to maintain its good standing. We therefore cannot say as a matter of law that [the lender] did not make a definite and substantial promise to [the borrower].

Related posts.

• Indiana’s Lender Liability Act Once Again Protects Bank From Borrower’s Claims
• ILLA Saves Bank From Alleged Misrepresentation That Loan Was “A Go”
• Alleged Oral Release Of Mortgage Rejected

__________I represent parties in disputes arising out of loans. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.