Litigation over promissory notes and related loan documents tends to be formulaic. Frequently, a borrower in clear default of some of the material terms of those documents (usually the obligation to repay the money borrowed) will tell his or her attorney that the loan documents were signed in reliance on a variety of representations the lender has since ignored or repudiated, giving rise to claims/defenses such as fraudulent inducement, negligent misrepresentation or the like. However, the promissory note and loan documents contain boilerplate merger and integration clauses, which lender’s counsel highlights in a summary disposition motion filed right out of the box. Lender’s counsel argues to the Court that the merger and integration clauses vitiate the element of reliance necessary to sustain a fraud claim, unless the alleged fraudulent conduct relates to the merger and integration clause itself (a counter-argument unavailable to the vast majority of borrowers). Lender’s counsel then trots out the frequently-cited cases of Ditzik v. Schaffer Lumber Co., 139 MichApp 81 (1984) and UAW-GM Human Resource Center v. KSL Recreation Corp, 228 MichApp 486 (1998) in support of the summary disposition motion.
The Courts frequently rule in favor of the lender based on those cases. When the borrower appeals, he or she invariably finds no succor at the Court of Appeals, where the appeal is denied based on those precedents. Is all hope lost for the defaulting borrower? It may depend on age-old cases the bench and bar have largely forgotten.
There is a line of Michigan Supreme Court cases holding that extrinsic evidence of fraud based on pre-contract misrepresentations or omissions which induce the contract must be submitted to the jury, even in the face of merger and integration clauses. In Plate v. Detroit Fidelity & Surety Co., 229 Mich 482, 486-487 (1924), the Michigan Supreme Court ruled that the “seal of silence as to actual fraud is not imposed by . . . [merger clause] provisions. . . . It has long been settled that such provisions in a contract do not prevent showing the contract is void by reason of false and fraudulent representations in its procurement.” The Plate holding has continued to be the rule of law on each occasion the Michigan Supreme Court has faced the question of whether a fraudulent inducement claim should be barred because of a merger and integration clause, which the opposing party seeks to use to prevent extra-contractual representations from being admitted to prove fraud. See Bendford v. Nat’l. Life & Accident Ins. Co., 356 Mich 52, 59 (1959); Gloeser v. Moore, 283 Mich 425, 429-430 (1938); Hanson v. Fletcher Auto Sales Co., 239 Mich 118, 120-121 (1927).
Heartened by those Supreme Court cases, borrower’s counsel can make a strong argument that Plate governs the issue, and not Ditzik and UAW-GM Human Resource Center, based on the maxim that “it is the Supreme Court’s obligation to overrule or modify case law if it becomes obsolete, and until this Court takes such action, the Court of Appeals and all lower courts are bound by that authority.” Boyd v. W. G. Wade Shows, 443 Mich 515, 523 (1993). Perhaps this will forestall the grant of summary disposition in favor of the lender and give the borrower some settlement leverage.
However, promissory notes and loan documents also frequently contain “no-reliance” clauses, which state that the parties have not executed the agreement in reliance on any representations, warranties or statements made by the other party other than those expressly set forth in the agreement. In Whitesell Corp. v. Whirlpool Corp., 2009 U.S. Dist. LEXIS 92320 (WD Mich October 5, 2009) at *11-12, the Court surveyed cases from other jurisdictions concerning the effect of such clauses and determined that:
“courts generally look for three factors to determine if a no-reliance clause will successfully abrogate the reliance element of a fraud claim. First, courts are more willing to enforce a no-reliance clause if the provision disclaiming reliance is its own separate clause rather than a provision embedded within another clause of the agreement, such as a merger clause or an exculpatory clause. . . . Second, courts are more willing to enforce a no-reliance clause if it expressly mentions and disclaims reliance. . . . Third, courts are more willing to enforce a no-reliance clause if the contracting parties are sophisticated.” [Citations omitted.]
Applying those factors, the Whitesell Court held that the lender was entitled to summary judgment against the borrower’s fraud claims that were based on alleged misrepresentations not specifically contained in the agreement. Id. at *12-14.
Thus, the battle between lenders and borrowers continues, with both sides having ammunition to use against the other.
To learn more about fraud claims when it comes to merger and integration clauses, please contact Stephen McKenney directly at Smckenney@neumananderson.com.
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