Ohio Supreme Court Holds Statute of Frauds Applies To Defenses, Too

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On March 6, 2014, the Supreme Court of Ohio held that the statute of frauds barred a group of guarantors from raising, as a defense to a collection suit, a claim that the bank’s right to enforce the guaranties was barred by an alleged oral agreement. In that case, FirstMerit Bank, N.A. v. Inks, Slip Opinion No. 2014-Ohio-789, BakerHostetler litigators Thomas Warren and Patrick Lewis persuaded Ohio’s high court that the statute of frauds applies equally to bar enforcement of oral agreements, whether offered in prosecution or defense of an action.

In Inks, the defendants personally guaranteed a commercial real estate loan that went into default. The bank foreclosed and the property was sold at a sheriff’s sale. The bank then obtained cognovit judgment against the guarantors. The guarantors moved to vacate the judgment, claiming they had a defense: an alleged oral agreement with the bank to stop the sale and release the bank's mortgage on the property for a discount. The bank vehemently denied an agreement had been made. Moreover, the bank argued, any defense based on the alleged agreement was barred by the statute of frauds.

The trial court denied their motion to vacate, holding that the alleged oral agreement violated the statute of frauds because it contemplated the release of the bank’s mortgage, which under the statute must be in writing to be enforceable. On appeal, the Ninth Appellate District reversed, concluding that the statute of frauds only prohibited parties from bringing an action to enforce certain types of oral agreements, but not from raising defenses. To the Ninth District, the defendants were free to raise the alleged oral agreement as a defense to the judgment, even if the statute of frauds prevented them from suing on the agreement.

The Supreme Court disagreed. Declining to adopt the Ninth District’s action/defense distinction, the Court unanimously reversed the Ninth District and reinstated the trial court’s judgment. Citing to precedent dating to the 19th Century, the Court held that “the statute of frauds bars a party from enforcing an oral agreement falling within the statute in either the prosecution or defense of an action.” Id. ¶ 22. In its holding, the Court recognized that “to allow the defendant to avail himself of [an oral agreement] as a defense would be enforcing it in his favor while the same right is denied to the other party, thus defeating the very object of the statute.” Id. at ¶ 20, quoting Tague v. Hayward, 25 Ind. 427, 429-430 (1865).

The Court’s holding in Inks underscores the importance of documenting agreements falling in the statute of frauds (e.g., commercial loans, real estate sales, and prenuptial agreements) in writing.

Topics:  Affirmative Defenses, Statute of Frauds

Published In: Civil Procedure Updates, General Business Updates, Finance & Banking Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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