The Illinois Credit Agreements Act: A Lender’s Best Defense, A Debtor’s Greatest Obstacle

In Illinois, if any aspect of an agreement is deemed to be a “credit agreement” under the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq. , and if the credit agreement is not a writing signed by both parties, then debtors may be barred from asserting certain claims, counterclaims, and defenses against the lender.  Klem v. First National Bank of Chicago, 275 Ill. App.3d 64 (1995).  A credit agreement is defined as any agreement by a creditor to lend money, extend credit, or forbear repayment for commercial purposes.  Under the Act, credit agreements, or amendments thereof, are unenforceable  unless both parties sign the agreement or amendment.  In this regard, the Act has a particularly harsh effect on debtors trying to sue lenders for deceptive  statements or conduct made in relation to a credit agreement.  The Act expressly precludes debtors from asserting claims/defenses like fraud, part performance, and equitable estoppel based on a lender’s oral statements or conduct.

When Does the Act Apply?

The Act applies to any commercial credit agreement or other non-credit agreement that is an integral part of a commercial credit agreement, e.g., a guaranty.  The Act’s requirements can be characterized as a much stricter incarnation of the common law statute of frauds, as the Act requires a writing signed by both parties in order for a credit agreement to be  enforceable.  This requirement not only applies to the initial credit agreement but also extends to any modifications and amendments of such agreement.  Even if only a portion of an agreement involves a credit agreement, the Act still applies.   The application of this Act by Illinois courts provide commercial lenders with significant protection, while leaving debtors vulnerable to unscrupulous lender conduct.  So what does this mean?

Scenario 1: Oral Statements

Let’s assume there is an existing loan agreement between a lender and a debtor, and before the agreement matures, the lender orally agrees to extend it for another two years over the phone.  The lender even sends the debtor an email summarizing the terms of the oral promise.  As a debtor, should you rely on this oral promise?  The answer is no.  The promise has to be in writing and signed by both lender and debtor to be enforceable.   Otherwise, the lender can change its mind and demand that the debtor pay the full amount on the original maturity date.  In this scenario, the debtor would have no recourse against the lender because of the Act.

Scenario 2: Reliance on Oral Statements

Now let’s assume that a lender induces a debtor to execute a $1 million promissory note, payable to the lender.  The lender orally promises that the debtor’s liability on the note will be extinguished upon the lender’s investment in the debtor’s company, which the lender promises it will make.  Relying on this promise, the debtor also invests his own $1 million in the company.  The lender later decides not to invest in the company and demands payment on the promissory note.  Can the debtor claim fraud by the lender?  Breach of contract?  Promissory estoppel?  No, no and no.  Fortunately for the lender, and unfortunately for the debtor, all of these claims/defenses are barred because they relate to a un-memorialized and un-signed credit  agreement, leaving the debtor personally liable to the lender for $1 million.

In Conclusion

If you are a debtor, before entering into any commercial loan or credit agreement, ensure that the agreement is in writing and signed by both you and the lender.  Any amendments or modifications to the agreement — however minor — also must be in writing and signed by both parties.  If in doubt as to whether the agreement is a “credit agreement” under the Act, put it in writing and have both parties sign it.  If you don’t, you risk being denied certain legal protections against the lender.

Conversely, if you are  a lender, ensure that your credit agreements contain a choice of law and venue selection provision mandating that disputes be litigated under Illinois law  in Illinois courts.  Lenders should take advantage of the broad protections afforded under the Act.

If you have any questions regarding commercial loans or credit agreements, please call one of our experienced attorneys at Acumen Law Group.

Authored by Bardia Fard, Esq. and Shoko Asaka, Law Clerk