Legal Memorandum: Liability for Advances made on a Line of Credit

Issue: Can a co-originator of a line of credit be held responsible for advances made on the line after that lender has been instructed to close the line of credit?

Area of Law: Banking & Finance Law
Keywords: Line of credit; Closure; Advances
Jurisdiction: Federal
Cited Cases: 654 N.E.2d 1333; 432 S.W.2d 305; 428 N.Y.S.2d 558; 675 N.E.2d 514
Cited Statutes: None
Date: 04/01/2001

           Courts generally have no ability to affect the contractual rights of people or entities who are not parties to the matter before it.  In Ellis v. Ellis, 730 N.E.2d 201 (Ind. Ct. App. 2000), one spouse contended that the court committed an abuse of discretion when it failed to order his name be removed from the car loan previously held by the couple when it ordered the wife to assume liability for the payments under the loan.  He argued that if she failed to maintain the regular payment schedule, he would be required to perform under the contract.  The court explained that

the trial court, while having the power to order [the ex-wife] to be solely responsible for the [car] loan, and further to hold [the ex-husband] harmless thereon, did not have the power to affect the obligee’s interest by ordering his name removed from the loan.


Id. at 204 (emphasis added). 

Courts have also not been quick to find a fiduciary relationship between a bank and its customers.  In Needham v. Provident Bank, 110 Ohio App. 3d 817, 675 N.E.2d 514 (1996), three lines of credit were granted a bank’s customer, CSSC, which accommodations were secured, in part, by the CSSC’s president’s (William Needham) home.  The company had a related entity, CFC, which was formed to provide financing to its customers through equipment leasing.  Following some financial difficulties, the companies rearranged the majority ownership, with control of each being shifted […]

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