All states have a statute of frauds, based on the original Statute of Frauds enacted in England in 1677, barring actions upon some types of promises unless evidenced by a writing signed by the party to be charged with the promise. The promises typically covered by a state’s statute of frauds include "any promise to answer for the debt, default, or misdoing of another," and "any agreement that is not to be performed within one year from the making thereof." Ky. Rev. Stat. Ann. § 371.010(4), (7). In Chin v. Chin, 494 S.W.3d 517 (Ky. Ct. App. 2016), the Kentucky Court of Appeals held that neither of these provisions barred a claim by parents ("the Chins") against their son ("Raymond") for breach of an oral contract to repay a college loan that the parents had taken out for his benefit.
In that case, Raymond attended college at the Rose-Hulman Institute of Technology, a top-ranked engineering college that carried a price tag of about $54,000 per year in 1999. At the time, Raymond’s father was making $55,000 per year as a teacher, while his mother was making $18,000 per year as an aide. The Chins obtained a Parent PLUS loan to pay for Raymond’s college expenses, which ultimately totaled more than $58,000 (Raymond received a partial scholarship). Although the Chins signed for the loan, Raymond orally agreed that he would be responsible for paying the loan, and would repay any amounts the Chins had already paid, as soon as he had a job. Raymond got a job in 2004, and began paying the Chins back in 2006. At first, Raymond wrote checks to the Chins with the notation "school loan" or "educational payment" in the memo portion of the checks. Raymond later arranged for his bank to automatically make monthly transfers from his account to the Chins’ account in the exact amount of the monthly loan payment.
When Raymond stopped making payments after about five years, the Chins filed suit to recover, among other things, the unpaid balance of the loan. Raymond defended on the basis of the statute of frauds, arguing that (1) his promise to repay the loan was a promise to answer for the debt of another, and (2) it was not possible or intended that the loan could or would be paid within a year. With regard to the first argument, the court of appeals noted that Kentucky Statutes § 371.010(4) applies only to the enforcement of a promise by the creditor and not by the debtor whose obligation was assumed by the promisor. Id. at 522. In addition, that provision in the statute of frauds does not apply where the consideration for the promise to pay another’s debt "redounds to the benefit of the promisor." Id. at 523 (internal quotations omitted). In Chin, the action was brought by the debtors—the Chins—not by the creditor that extended the loan to the Chins. The benefit of the loan redounded to Raymond; thus, it would have been inequitable for him to enjoy the benefits of his promise and then evade his part of the obligation because the promise was not in writing. Id.
With regard to the second argument, the statute of frauds does not apply to a contract that is no longer executory because it has been fully performed on one side and the other party has longer than a year to perform his part of the bargain. Id. at 522. The Chins fully performed their part of the agreement when they obtained the loan, thereby allowing Raymond to attend the college of his choice. As a result, the statute of frauds did not apply. Id. And while it was not essential to its decision, the court also found that the automatic withdrawal authorization and the checks signed by Raymond constituted written evidence of the parties’ oral agreement sufficient to satisfy the requirements of the statute of frauds. Id. at 523. Therefore, the court rejected Raymond’s affirmative defense under the statute of frauds in its entirety.
Chin represents a good, modern discussion of various ways to attack a statute-of-frauds defense in a contract action based on a verbal agreement. If you need assistance in resisting (or asserting) such a defense, give us a call and ask to speak to one of our experts on contract law.