ALL PARTIES MUST SIGN PAYOFF LETTERS
Did you, as a new lender, sign the payoff letter you received from your borrower’s prior lender?
As long as the payoff letter originates from and is signed by the prior lender it is enforceable against the prior lender, right? Not necessarily. In Minnesota, credit agreements, or a document that a court determines constitutes a credit agreement under Minnesota Statute, must be signed by both the debtor and creditor in order to be enforceable. Requiring both parties to a typical credit agreement to sign the document is, of course, standard procedure for Minnesota lenders. Recently, the Federal District Court of Minnesota held in Thomas & Wong General Contractor v. The Lake Bank, N.A.,1 that a payoff letter from an existing creditor of the borrower to the borrower’s new creditor also had to comply with the statutory requirements of a credit agreement. According to Minnesota Statute § 513.33, credit agreements must: (1) be in writing, (2) contain all the terms of the agreement, and (3) be signed by both the debtor and creditor.
So why does a payoff letter between two of the borrower’s creditors constitute a credit agreement under § 513.33? In the Thomas & Wong case, Thomas & Wong agreed to provide financing to Beardmore Investments. Beardmore Investments had a prior debt to The Lake Bank, and Thomas & Wong agreed to pay off the outstanding debt to The Lake Bank as part of the refinancing arrangement. The Lake Bank and Thomas & Wong discussed the arrangement, and The Lake Bank provided Thomas & Wong with two letters containing wiring instructions and collateral to be transferred upon payoff of Beardmore Investments’ debt to The Lake Bank. As agreed, Thomas & Wong paid The Lake Bank the amount required in the payoff letters, but The Lake Bank failed to transfer the collateral.
Subsequently, Beardmore Investments defaulted under its loan from Thomas & Wong. According to the court documents, Thomas & Wong demanded that The Lake Bank transfer the collateral as required under the payoff letters, but that The Lake Bank did not do so in a timely manner. In its suit against The Lake Bank, Thomas & Wong sought to enforce the collateral transfer obligations contained in the payoff letters, and to recover damages (based primarily on the diminution of collateral value) from The Lake Bank for its failure to timely perform.
In her opinion, Judge Montgomery ruled in favor of The Lake Bank because she determined that the payoff letters constituted an unenforceable credit agreement as they were not signed by Thomas & Wong. The Thomas & Wong case is the first time an agreement principally between two lenders was found to be a “credit agreement” under Minnesota Statute § 513.33. To support its conclusion, the court relied on cases from Colorado and Seventh Circuit interpreting statutes virtually identical to Minnesota’s § 513.33. According to the federal district court, the request to transfer collateral, the forbearance from exercising any remedies against that collateral, and a promise to pay off a prior debt, created a debtor/creditor relationship between Thomas & Wong and The Lake Bank. Thus, the payoff letters were “credit agreements” as defined in Minnesota Statute § 513.33 and must be signed by all parties in order to be enforceable. Additionally, the court concluded that the borrower must sign because the agreement required the assignment of a collateral interest in the borrower’s assets.
Practice Points: Make sure everyone signs the payoff letter – it is not enough to have the other lender’s signature when it comes time to enforce the agreement against that lender. Also, make sure all the terms of the payoff arrangement are contained in the letter. Remember, under § 513.33, a party has no right to enforce a credit agreement if the credit agreement does not meet the formal requirements of the statute.
1 2007 WL 4556688
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