Iowa Supreme Court Reinforces Strict Enforcement of Credit Agreements in Favor of Lenders

On May 9, 2025, the Iowa Supreme Court issued its decision in County Bank v. Shalla, which reinforces the broad application of Iowa Code section 535.17—the statute of frauds for credit agreements. This ruling is especially relevant for banks and other lenders, as it confirms that the statute bars not only contract claims based on unwritten credit agreements, but also tort claims, such as negligence and fraudulent misrepresentation, which may arise from oral promises to lend or facilitate credit.

Summary of the Case
In Shalla, the borrowers claimed their lender orally promised to secure financing for the borrowers to exercise a real estate buyback option. However, the deadline for the borrowers to exercise their option passed without financing in place, which resulted in the borrowers purchasing the property at a much higher price. The borrowers then defaulted on their loan and sought to raise tort claims related to their lender’s earlier oral promises.
The Iowa Supreme Court upheld the lower court rulings dismissing the borrowers’ claims for negligence and fraudulent misrepresentation. The Court found that even tort claims fall within the reach of section 535.17 when they are grounded in alleged oral credit agreements.

Key Legal Takeaways

• Broad Definition of “Credit Agreement”: The statute defines a credit agreement as any contract to loan money, finance a transaction, or otherwise extend credit. This includes all promises made in connection with such arrangements.
• Tort Claims Cannot Circumvent the Statute: The Court emphasized that allowing tort claims based on oral credit agreements would “dilute the force and effect” of the statute and violate the legislative purpose of ensuring written clarity in credit transactions.
• All Terms Must Be in Writing: Even side promises or ancillary terms—such as promises to assist in exercising purchase options or to represent a borrower’s interests—must be included in the signed, written agreement in order to be enforceable.
• No Relief via Promissory Estoppel or Equity: Iowa’s statute expressly displaces common law and equitable principles that might otherwise support enforcement of oral agreements.

Iowa Code Section 535.17: Pointers for Lenders
To further reduce risk and enhance enforceability, lenders should consider the following best practices drawn directly from Iowa Code § 535.17:

1. Document Every Material Term in Writing: A credit agreement must be signed and must include all material terms. Oral agreements, no matter how seemingly routine, are unenforceable.
2. Notify Borrowers About Modification Rules: If a lender notifies a borrower in writing that oral modifications will not be recognized, any future changes must be in writing. This helps insulate lenders from liability for informal changes discussed with bank officers or agents.
3. Use Statutory Disclosure Language: Lenders should include a conspicuous notification in their credit agreements that states oral modifications are not valid. The Iowa Code provides a model form for lenders to use in order to ensure compliance with Iowa law:  
   IMPORTANT: READ BEFORE SIGNING.  The terms of this agreement should be read carefully because only those terms in writing are enforceable.  No other terms or oral promises not contained in this written contract may be legally enforced.  You may change the terms of this agreement only by another written agreement.
4. Be Cautious with Employee Representations: Lenders should ensure their staff are trained —especially loan officers—about the importance of written agreements. Oral assurances can create legal exposure, even if ultimately barred by section 535.17.
5.  Understand the Consumer Loan Exception: Section 535.17 does not apply to consumer credit agreements made for personal, family, or household purposes where the amount involved is $20,000 or less.

Conclusion
The Shalla decision affirms the strength of Iowa’s statute of frauds for credit agreements as a defense for lenders. It sends a clear message: to be enforceable, credit agreements and modifications must be in writing and properly executed. By aligning operations with section 535.17, banks and lenders can better mitigate risk and ensure legal certainty in their credit transactions.

Please contact a banking and finance attorney with any questions and we will continue to update you. 

###

Simmons Perrine Moyer Bergman PLC is a full-service law firm with locations in Cedar Rapids and Coralville, Iowa. For more information, visit spmblaw.com. 

Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.