Email Exchanges Insufficient to Amend Loan Documents

On October 3, 2024, Justice Joel M. Cohen of the New York County Commercial Division issued a decision in Fortress Credit Corp. v. Cohen, Index No. 651498/2024, rejecting defendant's argument that email exchanges between lender and borrower, which never resulted in a signed agreement, were sufficient to extend borrower's repayment deadline under the loan documents, explaining:

Fourth, and most substantively, Defendant argues that genuine factual disputes exist as to whether there was an Event of Default under the Loan Agreement, which is the triggering event for application of the Guaranty. Although Defendant does not dispute that the borrower failed to make payments when due under the terms of the original Loan Agreement, he asserts that the agreement was effectively amended in a December 2023 email exchange between representatives of Fortress and CRE, and thus summary judgment is inappropriate at this time (NYSCEF 25). These emails discussed deferral of the repayment date under the Loan Agreement to the third quarter of 2025 in return for new Liens on several other of Defendant's properties (id.). In response, Plaintiff argues that the Loan Agreement, by its express terms, cannot be amended without a signed writing (NYSCEF 5 § 14.4[a]), which it claims precludes an amendment via the email exchange upon which Defendant relies.

The Court has reviewed the December emails and other documents submitted by Defendant, interpreting them in the light most favorable to Defendant as the non-moving party, and concludes that they do not as a matter of law constitute a valid and binding amendment of the Loan Agreement. Section 14.4(a) of the Loan Agreement provides unambiguously that "No amendment or waiver of any provision of [the Loan Agreement] ... shall be effective unless the same shall be in writing and signed" (NYSCEF 5). Such provisions are regularly enforced (e.g., Nassau Beekman, LLC v Ann/Nassau Realty, LLC, 105 AD3d 33, 39 [1st Dept 2013]; Barry Indus. LLC v Barry Street Holdings LLC, 2024 WL 1257205, at *2 [NY Sup Ct NY Cty Mar. 25, 2024]).

Section 14.4(d) of the Loan Agreement does not, as Defendant argues, permit acceptance of the December Emails as a viable amendment of the agreement. That provision reads as follows:

(d) Notwithstanding anything to the contrary contained in this Section 14.4, (i) Agent and the Borrowers may amend or modify this Agreement and any other Loan Document to grant a new Lien for the benefit of the Secured Parties, extend an existing Lien over additional Property for the benefit of the Secured Parties or join additional Persons as Credit Parties, and (ii) if the Agent and the Borrowers shall have jointly identified an obvious error, ambiguity, defect, inconsistency or any error or omission of a technical or immaterial nature, in each case, in any provision of the Loan Documents, then the Agent and the Borrowers shall be permitted to amend such provision and such amendment shall become effective without any further action or consent of any other party to any Loan Document if the same is not objected to in writing by the Required Lenders within three (3) Business Days following receipt of notice thereof.

Although the purported agreement described in the December Emails includes the granting of a new Lien for the benefit of Secured Parties (which can be accomplished under Section 14.4(d) without a signed writing), it goes well beyond that. Most significantly, of course, the email "agreement" purportedly would excuse a payment default by the borrower and extend the payment terms by more than one year. Section 14.4(d) cannot reasonably be read to permit such an unsigned amendment of the Loan Agreement, in derogation of the clear terms of Section 14.4(a), simply because it is joined with an otherwise lender-friendly provision adding collateral to the loan. The Court sees no ambiguity in the language of either 14.4(a) or 14.4(d) that would warrant a trial before a finder of fact. The bottom line is that under the plain language of the Loan Agreement no amendment of the loan repayment schedule-a clearly material term-is effective unless contained in a signed writing agreed by the parties. The December Emails do not, as a matter of law, constitute a signed writing as required by Section 14.4(a) of the Loan Agreement (Eaglehill Genpar LLC v. FPCG, LLC, 188 AD3d 527,529 [1st Dept 2020]).

An additional point here is that the lender and borrower had executed a Pre-Negotiation Agreement, or PNA, before engaging in workout discussions, and the PNA stated that no party was giving up any of its rights "unless and until a further written agreement is executed and delivered by such Party." As this case shows, this type of language in a PNA, combined with a clause in the relevant loan documents prohibiting an amendment without a signed writing, serves to protect a lender against a borrower's claim that the lender somehow agreed to a term that is not in the loan documents. Of course, the best practice for a lender in this situation is to also include a disclaimer in all of its communications with the borrower that its proposals, including drafts agreements and amendments, are subject to final approval of the lender and that nothing is binding or enforceable without a fully executed agreement or amendment.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning loan workouts and lender-borrower negotiations.