If a lawyer wishes to change the terms of an agreement and the changes are significant and concern many provisions of the agreement, the lawyer will often design a modified and adapted agreement to make those changes. A single modified and adapted agreement is often easier to read than the original agreement and a separate amendment (or a series of separate amendments). For financing transactions, the parties generally use modified and adapted credit agreements. When doing so for secured financing, the parties almost always intend that the immovable property that secured the original credit agreement continues to meet the obligations arising from the amended and adapted credit agreement, and as a recent case shows, it is important for the parties to ensure that the document clearly states that it is not intended to novation of the obligations arising from the original credit agreement. 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 District Court for the Northern District of Ohio that an amended and adapted loan agreement did not constitute a novation of the original loan agreement. The District Court found that, by largely reversing the rejection of adversarial proceedings resulting from chapter 7 insolvency proceedings, the District Court found that the amended and adapted loan agreement in fact constituted a novation of the original loan agreement (or at least that it was not clear whether it represented it). If the amended and adapted loan agreement did indeed constitute novation, the guarantees granted under the original loan agreement would be extinguished at the time when the parties concluded the amended and adapted loan agreement2.
2 The District Court referred the question of annulment of the district court`s decision to the first instance for further proceedings. While one may question the relevance of the evidence presented by the District Court to indicate that the parties may have intended to obtain a novation, the lesson that a lawyer preparing an amended and adapted funding agreement should draw from that decision is the importance of clearly explaining the parties` intention that the amended and adapted agreement does not constitute a novation. The Tribunal d`In re Fair Finance Company stated that the 2004 agreement was not expressly provided for, that the intention of the parties was that the original guarantee rights should continue.9 When drawing up an amended and adapted financing agreement, a lawyer should include an explicit statement that the agreement is not intended for novation or termination of the obligations arising from the original agreement. and, in the context of secured financing, that the guarantees created under the original agreement are intended to continue and guarantee the obligations arising from the amended and adapted agreement. To satisfy the second and third elements, all parties must have "clearly expressed their intention to replace or replace an old agreement". 3 The key to determining whether a novation has taken place is therefore the intention of the parties. . .