## Facts

- A California farming partnership financed crop operations through loans secured by future crop proceeds.
- In December 1994, a lender financed the partnership’s 1995 crop through a set of detailed written loan documents, including integration clauses and provisions requiring any amendment to be in a signed writing.
- The loan documents also stated there were no unwritten oral agreements and barred contradiction by evidence of oral agreements.
- After the 1995 crop failed, the borrowers could not repay the loan.
- The borrowers alleged the lender then orally offered a long-term restructuring to avoid bankruptcy, including: (1) subordination to new lenders for up to five years, (2) a 60/40 split of future crop proceeds between the lender and new lenders, and (3) forgiveness of any remaining balance after five years if the debt were reduced to a specified amount.
- The borrowers obtained new lenders for the 1996 and 1997 crops, and proceeds were split 60/40 during those years, consistent with the alleged oral arrangement.
- In 1998 the lender refused to subordinate to another new lender, and the borrowers claimed this breached the oral restructuring.
- The borrowers sued for breach of contract (as modification or novation) and promissory fraud; the district court granted summary judgment for the lender and awarded attorneys’ fees.
- The borrowers appealed the merits judgment and the fee award.

## Issues

1. Whether evidence of a subsequent oral agreement could support a breach-of-contract claim on a novation theory despite integration/no-oral-modification clauses and a statute of frauds defense.
2. Whether summary judgment was proper against the borrowers on the modification theory of breach of contract.
3. Whether summary judgment was proper against the borrowers on promissory fraud.
4. Whether the attorneys’ fee award could stand after partial reversal on the merits.

## Decision

- Reversed summary judgment on the breach-of-contract claim to the extent it was based on novation, and remanded for further proceedings.
- Affirmed summary judgment for the lender on the breach-of-contract modification theory.
- Affirmed summary judgment for the lender on the promissory fraud claim.
- Vacated the attorneys’ fee award and remanded for reconsideration in light of the altered merits disposition.

## Legal Principles

- Under California law, a modification changes terms of an existing contract, while a novation substitutes a new agreement and extinguishes the prior contract.
- Integration clauses and no-oral-modification provisions strongly support rejecting an alleged oral modification, but they do not categorically foreclose proof of a later, separate novation.
- Course of performance and partial performance may constitute evidence from which a factfinder can infer the existence of a new agreement and may bear on defenses such as the statute of frauds.
- On summary judgment, if the record permits a reasonable inference that a later agreement replaced the earlier one, the existence of a novation is for the trier of fact.

## Conclusion

The Ninth Circuit held that the borrowers produced sufficient evidence for a factfinder to decide whether a later oral restructuring replaced the written loan as a novation, even though the written documents contained strong integration and signed-writing requirements; it nonetheless upheld summary judgment against the borrowers on an oral-modification theory and on promissory fraud, and it vacated the lender’s attorneys’ fee award for reconsideration on remand.


Fanucchi & Limi Farms v. United Agri Prods. Fin. Servs., Inc., 414 F.3d 1075 (9th Cir. 2005)