statute of frauds oral loan agreement

[stanlaw1000]

if a lender fraudulently makes a promise to make a loan never intending to make the loan on the terms promised to induce the borrower to take action that is otherwise favorable to the lender, can the lender use the statute of frauds as a defense to the claim of the potential borrower???

 

[Michael Wechsler]

What is the borrower claiming? The statute of frauds is a defense that a contract exists. It may not work as a defense against fraud that one party attempted to mislead another party into thinking that a written contract was forthcoming in order to fraudulently induce that party into taking another action.

 

[stanlaw1000]

Originally posted by thelawprofessor:
What is the borrower claiming? The statute of frauds is a defense that a contract exists. It may not work as a defense against fraud that one party attempted to mislead another party into thinking that a written contract was forthcoming in order to fraudulently induce that party into taking another action.

The borrower claims that a brokerage firm promised to make him a margin loan on his stock in his company if he would let the brokerage firm be the lead underwriter on an IPO for the borrower's company. after the IPO was completed, the brokerage firm refused to make the margin loan. the brokerage firm now says that they didn't have to make the loan because the agreement to make the margin loan was not in writing.

 

[Michael Wechsler]

The statute of frauds should not absolutely bar someone from proving that a margin loan was to take place. One could argue a number of legal theories, e.g. unjust enrichment, detrimental reliance (I'll explain if necessary), etc. However, with a transaction of this magnitude, it would seem that the plaintiff would have a very difficult time proving this deal unless there was some written evidence that a loan was to take place and all the relevant and necessary numbers. If this was simply an open promise "we'll make you a special loan if you allow us to handle your IPO", then that might not be seen as there truly being a meeting of the minds with regard to that part of the transaction. it could also call into question whether or not the IPO was handled by this firm as a result of the promise to make a loan.