AN ORAL AGREEMENT TO FOREGO BANKRUPTCY IN EXCHANGE FOR NEW REPAYMENT TERMS MAY REPLACE THE ORIGINAL LOAN AGREEMENT
Fanucchi & Limi Farms v. United Agri Products
(United States Court of Appeals for the Ninth Circuit, July 14, 2005)
A secured creditor under a written contract may find itself bound by a subsequent oral agreement if the difference between the two agreements was "drastic," and the conduct of the parties' actions indicate that they considered the oral agreement to have extinguished and replaced the old one.
In Fanucchi & Limi Farms v. United Agri Products, 2005 WL 1645694 (9th Cir.(Cal.)), Fanucchi et alia ("Fanucchi") were general partners in a farming operation that entered into a written contract in 1994 with United Agri Products to finance Fannuchi's farming operations for the coming year. Pursuant to this contract, Fanucchi borrowed against its crop proceeds for 1995. The written contract consisted of several documents, two of which contained an integration clause requiring any alteration of the agreement to be in writing and signed by the parties in order to be effective.
When Fanucchi's 1995 crops failed, the partnership was unable to repay the more than one million dollars that it owed United. Fanucchi considered bankruptcy, but United persuaded Fanucchi instead to continue farming by orally promising, according to Fanucchi: (1) to subordinate United's debt to new crop financing loans from other lenders for up to five years; (2) to split the proceeds 60/40 after new crop creditors were paid, with 60% going to United and 40% to Fanucchi's other creditors; and (3) that if Fanucchi had paid the 1994 loan down to $300,000 or $400,000 by the end of the five year period, United would forgive that amount. In the spring of 1998, after the United employee who had allegedly made these oral promises to Fanucchi was terminated, United was no longer willing to perform in accordance with the oral agreement.
Fanucchi brought suit against United for promissory fraud and breach of contract. The district court granted summary judgment to United on both counts. The Ninth Circuit upheld summary judgment for United on the fraud claim, but overturned summary judgment on the breach of contract claim and remanded for further proceedings. The breach of contract claim was based on the oral contract, the consideration for which was Fanucchi's promise not to declare bankruptcy. Fanucchi's theory was one of novation under California Civil Code § 1698(d); he argued that the oral contract had terminated and replaced the earlier written one.
The court found that the following differences between the original written contract and the subsequent oral agreement constituted "drastic" changes which supported an argument for novation: (1) the change in payment schedule; (2) United's relinquishment of a substantial portion of its security interest by subordinating its lien to those of new crop lenders; and (3) the possible reduction of the principal by $300,000 to $400,000.
Furthermore, the court found that the parties' conduct in 1996 and 1997 indicated that the oral agreement had extinguished and replaced the written contract, because United performed during those years under the terms of the oral agreement: it subordinated its lien to those of the new crop lenders and took only 60 percent of the proceeds remaining after the new crop lenders had been paid.