Fair Warning: Amendments Or Supplements To Language Often Found In Amended And Restated Loan Agreements May Be Required

Recently, the U.S. Court of Appeals for the Sixth Circuit issued an opinion in the Chapter 7 bankruptcy case Bash v. Textron Financial Corporation (In re Fair Finance Company), which has important effect on a number of legal issues, including whether a trustee in bankruptcy can bring a conspiracy claim on behalf of a bankrupt entity that participates in a fraud (creating a split with the Second Circuit) and whether, for the purpose of a fraudulent conveyance, the statute of limitations runs from the time of the transfer or the time when the fraud occurred or could reasonably have been discovered. However, the blockbuster in the case is that the Court held that an amended and restated loan agreement, which contains language commonly used by many banks, may actually have been a novation of the original agreement resulting in the loss of the lender's security interest. This Advisory summarizes only that aspect of the holding which considered the question of whether the amended and restated loan agreement constituted a novation.

On January 7, 2002, Textron Financial Corporation and United Bank entered into a Loan and Security Agreement with Fair Finance Company (the "Debtor") and its parent, Fair Holdings, Inc. ("FHI") (the "2002 Agreement"). The 2002 Agreement created a revolving credit facility secured by the assets of the Debtor and FHI. To perfect the security interest, the lenders filed a UCC Financing Statement with the Ohio Secretary of State. In 2004, the Debtor, FHI and Textron entered into a "First Amended and Restated Loan and Security Agreement" (the "2004 Agreement"). The 2004 Agreement removed United Bank as a party and, as stated, evidenced the parties' "desire to amend and restate the Original Agreement." Bash v. Textron Fin. Corp. (In re Fair Fin. Co.), No. 15-3854, 2016 U.S. App. LEXIS 15432, at *37 (6th Cir. Aug. 23, 2016). The 2004 Agreement contained a "Grant of Security Interest" under which "the Debtor and FHI 'assign[ed] [Textron] a continuing security interest and lien upon'" their assets. Id. at *18. The 2004 Agreement went on to state that "[i]t is Borrowers' express intention that this Agreement and the continuing security interest granted hereby, in addition to covering all present obligations of Borrowers to Lender and its Affiliates...shall extend to all future obligations of the Borrowers to Lender intended as replacements or substitutions for the Obligations...." Id.

The "final provisions [of the 2004 Agreement]...