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Current Developments in the Commercial Divisions of the
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Posted: July 15, 2018

Integration Clause Bars Contract Claim Based on Alleged Oral Modification of Mortgage Documents

On June 26, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Israel v. Signature Bank, 2018 NY Slip Op. 31370(U), holding that an integration clause barred a breach of contract claim based on an alleged oral modification to a term sheet, explaining:

Here, MSI’s claim for breach of contract is not legally cognizable because, on the facts alleged in the amended complaint, MSI cannot demonstrate the existence of a binding oral contract obligating Signature Bank to extend the Mortgage Loans’ maturity dates and to reduce the interest rates. The written Mortgage Loans expressly prohibit oral modification of their terms. A written contract, which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.

The Notes provide that they may not be changed or terminated orally, but only by an agreement in writing signed by the party against whom enforcement of such change or termination is sought. The Mortgages contain a provision entitled “No Oral Change” which provides that each “Mortgage may only be modified, amended or changed by an agreement in writing signed by the Mortgagor and the Mortgagee. No waiver of any term, covenant or provision of this Mortgage shall be effective unless given in writing by the Mortgagee.

Additionally, the alleged oral modification is barred by the statute of frauds applicable to interests in real property, including mortgages. The statute of frauds provides that mortgages and modifications to mortgages may only be created, granted, assigned, surrendered or declared by a deed or conveyance in writing. An agreement to provide mortgage financing is subject to the Statute of Frauds and thus there must be a specific signed writing pursuant to which a bank obligates itself to provide mortgage financing.

Contrary to MSI’s contention, the repayment of the $3 Million Loan and partial payment of the $5 Million is not sufficient to show unequivocal part performance of an alleged oral agreement to refinance and extend the terms of the Mortgage Loans. In certain narrow circumstances, part performance by one party of an alleged oral modification to a written agreement may be sufficient to demonstrate an enforceable oral modification, even where the original written agreement contains an express prohibition against such modification. Significantly, however, the part performance must be unequivocally referable to the alleged newly modified agreement. It is not sufficient that the oral agreement gives significance to plaintiffs actions. Rather, the actions alone must be unintelligible or at least extraordinary, explainable only with reference to the oral agreement.

Here, MSI’s tender and Signature’s acceptance of the payments of money indisputably owed by MSI under the Mortgage Loans demonstrate, at most, that MSI chose to early pay down the principal amount of the Mortgage Loans to induce MSI to agree to the possible future modification of the Mortgage Loans. Indeed, the Term Sheet, which was executed by both Signature and MSI, provides that Signature Bank is willing to consider your request to modify and extend its above referenced credit facilities on the following terms, including, among other, numerous conditions, a
paydown of the loans’ principal amounts. As expressly stated in the Term Sheet, the payments are readily explainable as preparatory steps taken with a view toward consummation of an agreement in the future, such that performance is not unequivocally referable to the new contract.

(Internal quotations and citations omitted).

New York contract law–usually straightforward–has traps for the unwary, like the effect of an integration clause, which disclaims prior discussions and agreements and states that the parties’ entire agreement is just the written contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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