Friday, October 7, 2005
Complex and sophisticated loan documents that provide they cannot be amended except in writing can nevertheless be modified by by oral agreement. That’s the lesson from a recent Ninth Circuit opinion, Fanucchi & Limi Farms v. United Agri Products, decided under California law.
The case involved a debtor's claim that its lender orally agreed to allow its existing loan to be subordinated to new financing obtained by the debtor. The case was dismissed because the loan documents specifically prohibited oral modifications. The Ninth Circuit reversed. It’s true, says the court, that oral amendment would violate the contract terms, but a subsequent oral agreement can work a novation of the original loan documentation. The oral agreement would thus simply displace the earlier detailed and un-amendable written agreement with an amendable oral one.
Peter S. Munoz of Reed Smith in San Francisco offers an overview of the case (and an evaluation from a lender’s perspective) in Ninth Circuit Allows Oral Agreement To Supersede Loan Documents.