Consol. Serv. v. KeyBank Nat'l. Assoc.& KeyCorp, 98-4221

• Decision Date: 26 August 1999
• Docket Number: No. 98-4221,98-4221
• Parties: (7th Cir. 1999) Consolidation Services, Inc., Plaintiff-Appellant, v. KeyBank National Association and KeyCorp, Defendants-Appellees
• Court: U.S. Court of Appeals — Seventh Circuit

Page 817

185 F.3d 817 (7th Cir. 1999)

Consolidation Services, Inc., Plaintiff-Appellant, v. KeyBank National Association and KeyCorp, Defendants-Appellees.

No. 98-4221

United States Court of Appeals, Seventh Circuit

Argued May 20, 1999

Decided July 22, 1999

Rehearing and Suggestion for Rehearing En Banc Denied August 26, 1999^*.

Appeals from the United States District Court for the Northern District of Indiana. No. 3:98cv0014AS--Allen Sharp, Judge. [Copyrighted Material Omitted] Before Posner, Chief Judge, and Easterbrook and Rovner, Circuit Judges.

Posner, Chief Judge.

This is a diversity suit for breach of contract brought by Consolidation Services, Inc. (CSI) against a bank. Applying Indiana law, which the parties agree governs the substantive issues in this case, the district judge granted summary judgment for the bank on the basis of the Indiana Credit Agreement Statute of Frauds, Ind. Code sec. 32-2-1.5. 29 F. Supp. 2d 942 (N.D. Ind. 1998). CSI argues that the requirements of the statute of frauds were satisfied, but alternatively seeks to avoid it by invoking doctrines of partial performance, fraud, and estoppel, both equitable and promissory.

CSI, a freight forwarder, had several outstanding real estate loans from the defendant bank plus a bank account and line of credit. Deciding to expand its business it made a number of new contracts with railroads, discovered that it was overextended, and sought an $8 million loan from the bank, which was refused. The bank did, however, agree to lend it $2.7 million for six weeks to give it time to seek longer-term financing. Repayment was due on September 30, 1994, but, with CSI strapped, the bank agreed to extend the loan, first to November 30, then to December 31, and finally to February 15, 1995. The parties met that day but have conflicting versions of what occurred at the meeting. They agree, though, that the bank, through its representative Joseph McGraw, made an oral offer to forbear collection efforts for another 45 days if CSI would allow the bank to take $500,000 from CSI's bank account and apply it to the repayment of the loan; would execute two mortgages to the bank; would establish a lockbox at the bank for the deposit of CSI's revenues; and would cross- collateralize the loan, that is, make the collateral for the bank's real estate loans to CSI also collateral for the $2.7 million loan. CSI claims that it accepted McGraw's offer (also orally) and that the bank promised to reduce their agreement to writing but never did so. The bank claims that CSI rejected the offer and that the bank then offered a 7-day forbearance in exchange for just the mortgages and the $500,000 and that CSI agreed to this substitute offer.

CSI executed the mortgages and authorized the bank to take $500,000 from its bank account. At the end of 7 days the bank began collection efforts by taking an additional $1.2 million from the account. This action precipitated CSI into insolvency because, in reliance on the 45-day agreement (it claims), it had not yet lined up substitute financing. Eventually it brought this suit for breach of the alleged contract to delay collection by 45, not 7, days in exchange for the four concessions that the bank had demanded.

An ordinary statute of frauds merely requires that the party sought to be charged, in this case the bank, sign a memorandum of the parties' agreement. The memorandum needn't be the contract itself; it need only be evidence of the contract and the contract's essential terms, Newman v. Huff, 632 N.E.2d 799, 803 (Ind. App. 1994); Block v. Sherman, 34 N.E.2d 951 (Ind. App. 1941); Bower v. Jones, 978 F.2d 1004, 1009 (7th Cir. 1992); Vess Beverages, Inc. v. Paddington Corp., 941 F.2d 651, 654 (8th Cir. 1991); Restatement (Second) of Contracts sec. 131, comment d (1981), and the other party to the alleged contract need not have signed anything. Consolidated Bearings Co. v Ehret-Krohn Corp., 913 F.2d 1224, 1231 (7th Cir. 1990); St. Francis Medical Center v. Vernon, 576 N.E.2d 1230 (Ill. App. 1991). But like most other states in recent years, see, e.g., Whirlpool Financial Corp. v. Sevaux, 96 F.3d 216, 225 (7th Cir. 1996) (Illinois); Todd C. Pearson, Note, "Limiting Lender Liability: The Trend Toward Written Credit Agreement Statutes," 76 Minn. L. Rev. 295, 296-97 (1991); Jeffrey A. Tochner, Note, "Limiting Lender Liability in Florida: The Application of a Statute of Frauds to Credit Agreements," 44 Fla. L. Rev. 807, 808 (1992), Indiana has added to its statute of frauds special provisions relating to credit agreements. The term includes agreements to "forbear from exercising rights under a prior credit agreement," Ind. Code sec. 32-2-1.5-5, which the agreement to forbear collecting the bank's loan to CSI is rightly conceded to have been. Rural American Bank v. Herickhoff, 485 N.W.2d 702, 705-06 (Minn. 1992); Carlson v. Estes, 458 N.W.2d 123, 128 (Minn. App. 1990); First National Bank v. McBridge Chevrolet, Inc., 642 N.E.2d 138, 141 (Ill. App. 1994). The agreement itself must be in writing, must "set[ ] forth all the material terms and conditions of the agreement," and must be signed by both creditor and debtor. Ind. Code sec. 32-2-1.5-5; see also sec. 32-2-1.5-4.

McGraw, the bank's representative at the crucial meeting of February 15, described the 45-day offer at his deposition. The deposition was of course transcribed, and McGraw signed the deposition, thus attesting to its accuracy, while CSI's representative had already signed the mortgages. CSI argues that both debtor and creditor thus signed an agreement setting forth the material terms of the forbearance agreement. The argument is frivolous. The execution of the mortgages was not part of the agreement but part of the performance contemplated by it; the deposition was not an agreement; and the terms referred to in the deposition were the terms of an offer, not of an agreement--there was no written agreement, that is, a writing which not only contains terms but also indicates that the terms have been accepted. Bower v. Jones, supra, 978 F.2d at 1009; Ed Schory & Sons, Inc. v. Society National Bank, 662 N.E.2d 1074, 1079 (Ohio 1996); compare Newman v. Huff, supra, 632 N.E.2d at 803; Johnson v. Sprague, 614 N.E.2d 585, 588 (Ind. App. 1993).

The alleged 45-day forbearance agreement would be unenforceable even if only the general statute of frauds, and not the more stringent provisions governing credit agreements, were applicable here. It is true that the admission by the party to be charged that a contract exists can take the place of the signed memorandum ordinarily required to comply with the statute of frauds. Bower v. Jones, supra, 978 F.2d at 1009; DF Activities Corp. v. Brown, 851 F.2d 920, 923 (7th Cir. 1988); Holmes v. Torguson, 41 F.3d 1251, 1255 (8th Cir. 1994); Nebraska Builders Products Co. v. Industrial Erectors, Inc., 478 N.W.2d 257, 268-69 (Neb. 1992); Quaney v. Tobyne, 689 P.2d 844, 851 (Kan. 1984). But McGraw's deposition did not admit the existence of the 45-day forbearance agreement, only the offer of such an agreement plus a subsequent agreement for a 7-day forbearance. The deposition is no evidence at all for the 45-day agreement; indeed, if it is believed, it is conclusive evidence against the existence of any such agreement, for if believed this means the offer was rejected. So we needn't get into the question, on which see Monetti, S.P.A. v. Anchor Hocking Corp., 931 F.2d 1178, 1182-83 (7th Cir. 1991); E. Allan Farnsworth, Contracts sec. 6.7, pp. 395-96 (3d ed. 1999), when if ever a written offer satisfies the statute of frauds.

CSI argues that partial performance can take a contract out of the statute of frauds (again and throughout the remainder of this opinion we shall be discussing the general statute of frauds, not the special provisions for credit agreements which being stricter are even more conclusive against CSI's arguments). The principal purpose of the statute of frauds is evidentiary. It is to protect contracting or negotiating parties from the vagaries of the trial process. A trier of fact may easily be fooled by plausible but false testimony to the existence of an oral contract. This is not because judges or jurors are particularly gullible but because it is extremely difficult to determine whether a witness is testifying truthfully. Much pious lore to the contrary notwithstanding, "demeanor" is an unreliable guide to truthfulness. Michael J. Saks, "Enhancing and Restraining Accuracy in Adjudication," 51 Law & Contemp. Probs., Autumn 1988, pp. 243, 263-64.

When, however, there is particularly compelling evidence of the contract's existence, the strictures of the statute of frauds can safely be relaxed, for example in the case of an admission. Partial performance is often indicative of a contract, but rarely of its terms, and so in most cases of partial performance of a contract subject to the statute of frauds the performer is remitted to his (noncontractual) remedy in quantum meruit for the value of his performance. Cato Enterprises, Inc. v. Fine, 271 N.E.2d 146, 159 (Ind. App. 1971); Monetti S.P.A. v. Anchor Hocking Corp., supra, 931 F.2d at 1183-84; McInerney v. Charter Golf, Inc., 680 N.E.2d 1347, 1352 (Ill. 1997); Fry Racing Enterprises, Inc. v. Chapman, 497 S.E.2d 541, 545 (W. Va. 1997) (per curiam).

The fact that CSI executed the two mortgages and allowed the $500,000 to be deducted from its bank account is as consistent with a 7-day forbearance agreement as with a 45-day agreement and so does not help to establish CSI's version of the contract. CSI's failure to authorize a lockbox arrangement and cross-collateralization is actually evidence in favor of the bank's version, though CSI tries to explain away this evidence by arguing that it was waiting for the bank to take the initiative with respect to these aspects of the agreement. And if CSI's partial performance counts for its version of the contract, the bank's partial...