Consumer Lending, News

Ohio Supreme Court rules oral agreements on loan mods not binding

GavelThe Ohio Supreme Court ruled in favor of lenders earlier this month when it said that loan modifications and their corresponding terms must be in writing and signed by all parties to make them legally binding.

The ruling came following an appeal by FirstMerit—a $24.1 billion financial services firm headquartered in Akron, Ohio, operating in Ohio, Michigan, Wisconsin, Illinois and Pennsylvania—of an earlier court ruling that sided with the borrowers.

According to court documents, in 2005, FirstMerit loaned $3.5 million to real estate company Ashland Lakes. Daniel and Deborah Inks and David and Jacqueline Slyman guaranteed the entity would repay the loan, but after Ashland Lakes defaulted on the loan in 2009, FirstMerit sued the borrowers to recover the outstanding balance of the loan.

FirstMerit agreed, however, to stop foreclosure and auction proceedings against real estate properties owned by the borrowers upon execution of a forbearance agreement that required the Inkses and Slymans to provide the company with a $200,000 deposit and $9,000 appraisal fee.

Inks said in court documents he informed FirstMerit that he would only be able to raise $150,000 of the deposit, which he alleged was approved by the firm in an oral agreement.

After Inks received a draft forbearance agreement stipulating a $200,000 deposit, he allegedly contacted FirstMerit to contest the terms. Inks said FirstMerit told him if he provided the $150,000 deposit and appraisal fee the following day, the company would stop foreclosure and auction proceedings. The bank denied ever having reached such an agreement.

Inks alleged that a FirstMerit representative failed to return his calls regarding payment and was allegedly told the next day it was too late to make the payment. The properties were then sold.

FirstMerit received a judgment in the amount of $3.3 million against Inks and Slyman, who said they should be released from their obligation under the judgment because they had allegedly reached an oral agreement with FirstMerit that the company failed to uphold. The court said, however, Ohio’s statute of frauds prohibits a defense based on an oral agreement.

An appeals court later reversed the Summit County court’s ruling, saying the borrowers’ actions did not fall within the scope of the statute.

The lawsuit is just one of several filed against FirstMerit in recent years. In 2010, consumers filed a class-action lawsuit against FirstMerit accusing the bank of re-ordering transactions in order to collect overdraft revenue.

The bank’s shareholders also filed suit against the company in 2012, alleging that the bank’s board approved executive pay packages rejected by investors in a vote.

Jeff Quayle, general counsel for the Ohio Bankers League, of which FirstMerit is a member, said all lenders should be pleased with the outcome of the case.

“Had this Court of Appeals decision not be reversed, it would have resulted in a substantial loss to the lender and created a precedent that would have adversely impacted lenders, making workout negotiations more difficult than they already are,” Quayle said.

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