Recently, in Bash v Textron Financial Corporation (In re Fair Finance Company),1 the U.S. Court of Appeals for the Sixth Circuit overturned a decision of the U.S. District Court for the Northern District of Ohio that an amended and adjusted loan agreement did not constitute a novation of the original loan agreement. In doing so, the District Court held that where the District Court largely reversed the rejection of plea proceedings resulting from Chapter 7 insolvency proceedings, the amended and adjusted loan agreement was in fact a novation of the original loan agreement (or at least it is unclear whether it constituted it). If the amended and adjusted loan agreement does constitute novation, the collateral granted under the original loan agreement would have expired at the time the parties entered into the amended and adapted loan agreement.2 The District Court referred the issue of annulment of the District Court`s decision to the lower court for further proceedings. The decision will surprise many financiers and lawyers, who would normally see a „change and reformulation” as a continuation of the existing installation agreement, rather than a new agreement that ended the old one. The distinction can have radically different consequences, as was the case here. In Manasseh, two of the three members of the Court noted that the „modification and reformulation” contributed to the replacement (and thus termination) of the earlier facility agreement to which the guarantee referred. Since the guarantor did not agree with the replacement institution, his guarantee did not extend to it.
The bank`s case was not helped by the fact that it had given the guarantor a form of consent that had been refused and had therefore had to argue that the consent it had required as a condition of the amendment was in fact not required. If a lawyer wishes to change the terms of an agreement and the changes are significant and affect many provisions of the agreement, the lawyer will often draft a modified and tailored agreement to make those changes. A single modified and adjusted agreement is often easier to read than the original agreement and a separate amendment (or a series of separate changes). In financing transactions, the parties generally use modified and adjusted credit agreements. When doing so for secured financing, the parties almost always intend that the property that secured the original loan agreement will continue to secure obligations under the amended and adjusted loan agreement, and as one recent case shows, it is important for the parties to ensure that the document clearly states that it is not intended to novation of obligations under the original loan agreement. The bank claimed that a guarantee given for the purposes of the facility, as originally documented, extended to the „modified and adjusted” facility agreement, which came into effect after defaults as a global financial crisis. Much has revolved around the interpretation of the documents of the facility and the guarantee itself, although the case is of interest to both financiers, lawyers and guarantors, as it was a standard guarantee used by one of the big four banks and the situation is common in practice. .
