If You Loan Someone Money, It May Be Considered a Gift Unless the Terms of the Loan Are in Writing

contract mistake 300x121 If You Loan Someone Money, It May Be Considered a Gift Unless the Terms of the Loan Are in Writing

In the matter of NES Energy Inc. v Mazzarro, Suffolk County Ct, Oct. 21, 2010, Tarantino, J., index No. 32340/06 (2010 NY Slip Op 51910 [U]), the plaintiff sued the defendants for non-payment of two unsecured personal loans that it made to the defendants.  The defendants argued that since there was no written agreement for repayment of any money, then the money should be considered a “gift,” and they should not have to pay it back.

Defendant Anthony Mazzarro was employed by the plaintiff, N.E.S. Energy, Inc., as a general manager for over ten years.  The company’s principal owner, Phillip Bonsignor, was Mazzarro’s uncle.

At a family dinner, Mazzarro’s family, including Bonsignor, expressed their common belief that Mazzarro and his wife needed to move their family from the crime-ridden neighborhood in which they resided.  Bonsignor said, “you find a new house, I will help you out” with the down payment.  Bonsignor testified that the money given was a loan, to be repaid by deductions from Mazzarro’s Christmas bonuses, which were paid each year depending on company profits.

On December 7, 2001, Bonsignor gave Mazzarro a check in the amount of $13,650.00, payable to Anthony and Karrie Mazzarro, and wrote in the memo space of the check “loan for a new home.”  On February 26, 2002, Bonsignor gave Mazzarro a second check, in the amount of $16,200.00, but left the memo space blank.

Mazzarro testified that when Bonsignor said, “I will help you out,” Mazzarro assumed any money would be a gift.  He further stated that neither the words “gift” or “loan” were used during his conversation with Bonsignor.

After the checks were cashed and used as a down payment on Mazzarro’s new home, Bonsignor proceeded to take deductions from Mazzarro’s bonuses for the next three years, totaling $3,500.00.  In 2007, Mazzarro left the company, and the payments ceased.  Despite demands, Mazzarro refused to make further payments.

Was Anthony Mazzarro obligated to pay back the rest of the money?

In this case, the Court found that since “loan for a new home” was clearly written on the check cashed by Mazzarro, the money was intended to be a loan.  However, not all loans have to be repaid.

New York General Obligations Law 5-701: The Statute of Frauds

Section 5-701 of the General Obligations Law of the State of New York provides, in pertinent part, that “Every agreement, promise or undertaking is void, unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent, if such agreement, promise or undertaking … by its terms is not to be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime.”

In other words, if you have an oral agreement with someone to loan him or her money, the terms of that agreement must provide for the repayment of the loan within one year. If the borrower agrees to pay back the money in installments, and under the installment plan it would be impossible to repay the entire loan within one year, the loan itself will be invalidated under the Statute of Frauds if it is not in writing.  However, if repayment of the loan is indefinite or dependent upon a contingency that may happen within one year, an oral loan will still be valid.

As long as the agreement may be “fairly and reasonably interpreted” such that it may be performed within a year, the Statute of Frauds will not act as a bar however unexpected, unlikely, or even improbable that such performance will occur during that time frame. Id. Open-ended agreements with no set time for repayment do not violate the Statute of Frauds (Constantini v Bimco Industries, 125 AD2d 531, 510 NYS2d 136 [2d Dept 1986]).  Where there is absolutely no possibility in fact and law of full performance by both parties within one year, the Statute of Frauds bars enforcement of an oral contract (Americana Petroleum Corp. v Northville Industries Corp, 200 AD2d 646, 606 NYS2d 906 [2d Dept 1994]).

In this case, Bonsignor stated that repayment of the loan was to be made by taking deductions from Mazzarro’s Christmas bonuses.  This oral multi-year installment agreement was supported by the fact that three subsequent annual deductions were taken from Mazzarro’s bonuses.  There was clearly no expectation that the full amount of each loan would be paid within one year.

So, even though the Court held that the money given to Mazzarro and his wife was clearly a loan and not a gift, the fact that Bonsignor established a repayment schedule that could not be performed within one year and failed to put the terms of the loan in writing barred him from being able to recover the remainder of his loan from his nephew.

The Court dismissed the case.

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