By: Thomas S. Tripodianos Published: October 2009

No Oral Modification of Loan Agreement

Question. Bank seeks to collect on a note (the Note) executed by Borrower, guaranteed by the Guarantors. Pursuant to provisions set forth in the Loan Agreement executed at even date with the Note, Borrower was granted the option to extend the maturity date upon the existence of certain conditions. By amendment to the Loan Agreement, Bank and Borrower agreed that notwithstanding the failure of all conditions specified the maturity date would be extended. When payment was not made as promised, Bank sent Borrower and the Guarantors a notice of default.

Bank seeks a judgment against Borrower for the principal amount of the Note plus interest, and judgment against the Guarantors.

Guarantor asserts that the vice-president of Bank, told him that “we didn’t need to worry about the pending maturity of the notes (and) that the Bank would extend the loan on commercially reasonable terms for an additional year.”

Can a bank official orally agree to an extension of the maturity date of a note?

Answer. YES, but not under these facts.

The vice-president of Bank does not specifically deny the oral promises allegedly made by him, but refers to his letters to Borrower in which he advised Borrower that it was not entitled to rely on any oral statements purportedly made by Bank to refrain from exercising any of its rights under the Loan Agreement, the Notes, the Mortgages or any other Loan Documents. Bank acknowledges that after declaring the Note in default it did engage in negotiations relating to a possible extension of the Note, and that the parties entered into what Bank refers to as a Pre-Negotiation Agreement. Therein the parties agreed that no modification of the loan shall constitute a legally binding agreement until reduced to written documentation which is signed by all necessary parties and that Bank may terminate the negotiations for any reason or no reason, and defendants acknowledged that none of them has any defense, setoff, claim, counterclaim or cause of any kind or nature whatsoever with respect to the Loan Documents.

With respect to the claim of an oral modification of the maturity date of the Note, it specifically provides that Bank shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies, and no waiver of any kind shall be valid unless in writing and signed by Bank. Also, as noted above, the Pre-Negotiation Agreement similarly bars an oral modification of the loan documents.

When an agreement contains a clause requiring any modification of the terms of such (agreement) to be in a writing signed by the (Bank), an oral modification is generally unenforceable. Exceptions to the foregoing principle will be applied in situations where a party can show partial performance...unequivocally referrable to the oral modification, as well as when the Bank has induced another’s significant and substantial reliance upon an oral modification, in which case an estoppel may be invoked to bar a party from enforcing the no oral modification clause.

The purpose of estoppel is to prevent someone from enforcing rights that would work injustice on the person against whom enforcement is sought and who, while justifiably relying on the opposing party’s actions, has been misled into a detrimental change of position. Here, in light of the facts asserted, including the letters and the provisions of the Pre-Negotiation Agreement, Borrowers have not shown that they were misled or that they significantly and justifiably relied on (the alleged oral promise to their) disadvantage, and thus an essential element of estoppel is lacking.

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