In the recent decision FirstMerit Bank, N.A. v. Inks, 138 Ohio St.3d 384, 2014-Ohio-789, the Supreme Court of Ohio held that Ohio’s statute of frauds prevents a party in a foreclosure action from asserting an oral forbearance agreement as a defense.
FirstMerit Bank, N.A. made a $3.5 million commercial loan personally guaranteed by the defendants. After the defendants defaulted under the agreement, the parties entered into three written forbearance agreements, each of which provided that any changes or amendments were required to be in writing. The defendants breached these agreements but claimed that after they breached, they entered into a final, oral forbearance agreement with FirstMerit to prevent the sale of the property at sheriff’s auction. Despite this alleged oral modification, the real estate securing the loan was sold at a sheriff’s auction in an Ashland County foreclosure proceeding.
At issue was whether Ohio’s statute of frauds precludes a defendant from asserting the oral modification to a contract as a defense to an action. Ohio’s statute of frauds has existed for more than 150 years and has, since its enactment, held that “[n]o action shall be brought whereby to charge the defendant . . . upon a contract or sale of lands . . . or interests in or concerning them . . . unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party charged therewith.” Because the statute begins with the phrase “no action shall be brought,” the defendants attempted to distinguish between bringing an action to enforce an oral agreement which violates the statute of frauds, and asserting the agreement as a defense to foreclosure.
In rejecting the defendants’ argument, the Supreme Court held that Ohio’s statute of frauds applies to the attempted enforcement of an oral agreement falling within the statute either in prosecution or defense of the action. This decision puts to rest the division between appellate districts as to whether such an oral modification is subject to the statute of frauds and whether such a modification must be in writing to be asserted as a defense. Under this ruling, borrowers will need to get any forbearance agreement in writing, executed by the lender, as oral agreements will not be a defense to a foreclosure action.
If you have any questions regarding this opinion, or other questions regarding real estate security agreements, or other business transactional documents, please contact a member of our Corporate & General Business Practice Group or Finance and Creditors Rights Practice Group below.
This has been prepared for informational purposes only. It does not contain legal advice or legal opinion and should not be relied upon for individual situations. Nothing herein creates an attorney-client relationship between the Reader and Reminger. The information in this document is subject to change and the Reader should not rely on the statements in this document without first consulting legal counsel.
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