Statute of frauds as to loans for more than $50,000

THRESHOLD DOLLAR AMOUNT FOR STATUTE OF FRAUDS IN LOAN CONTRACTS 

The statute of frauds provides that a "loan agreement in which the amount involved in the loan agreement exceeds $50,000 in value is not enforceable unless the agreement is in writing and signed by the party to be bound or . . . [his] authorized representative." TEX. BUS. & COM. CODE § 26.02(b). The statute also provides that in such a loan agreement, the financial institution must give the debtor the following notice:

This written loan agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

Id. § 26.02(e). This notice "must be in type that is boldface, capitalized, underlined, or otherwise set out from surrounding written material so as to be conspicuous." Id. "Generally, if a contract falls within the statute of frauds, then a party cannot enforce any subsequent oral material modification to the contract." SP Terrace, L.P. v. Meritage Homes of Tex., LLC, 334 S.W.3d 275, 282 (Tex. App.-Houston [1st Dist.] 2010, no pet.) (citing Dracopoulas v. Rachal, 411 S.W.2d 719, 721 (Tex. 1967)).

SOURCE: HOUSTON COURT OF APPEALS - 01-13-00855-CV – 12/30/2014  

 Statute of Frauds: Tex. Bus. & Com. Code § 26.01 and 26.02 

In this case, both the deed of trust and the promissory note executed in 2001 are subject to the statute of frauds as contracts involving a loan agreement in excess of $50,000 in value. Tatum argues that the statute of frauds does not bar evidence of a subsequent oral modification because the deed of trust does not include the statutory language. However, the statute specifies that the language about the nullity of oral agreements may be contained in "a separate document signed by the debtor . . . or incorporated into one or more of the documents constituting the loan agreement." TEX. BUS. & COM. CODE § 26.02(e). In this case, the statutory notice appears in boldface, capitalized type at the bottom of the promissory note that Tatum signed. Thus, the terms of the promissory note prohibit enforcement of a subsequent oral modification.

In Ellen v. F.H. Partners, LLC, No. 03-03-00310-CV, 2010 WL 4909973 (Tex. App.-Austin Dec. 1, 2010, no pet.) (mem. op.), the court of appeals held that a subsequent oral statement by a bank representative could not be enforced as a contract. After Sonny Ellen defaulted on a $500,000 mortgage for the purchase of real property, he approached the note holder's loan officer and asked for time to refinance or sell the property before the initiation of foreclosure proceedings. Ellen, 2010 WL 4909973, at *1. Ellen contended that the loan officer said such delay was "doable," which he interpreted as a promise to delay foreclosure. Id. But the property was sold at a foreclosure auction, and Ellen sued for promissory estoppel. Id. at *2. The court of appeals affirmed the trial court's take-nothing summary judgment. The appellate court held that because the loan agreement included a signed, written notice of invalidity of oral statements and because the loan agreement was subject to the statute of frauds, Ellen could not enforce an oral modification to the loan agreement. Id.

The same logic applies to this appeal: because the promissory note was subject to the statute of frauds and it included the statutory notice of invalidity of oral statements, any oral modification to Tatum's loan is unenforceable. See id.

Nevertheless, Tatum argues that his contract claims are not barred by the statute of frauds because the partial-performance exception applies.

PARTIAL PERFORMANCE EXCEPTION TO STATUTE OF FRAUDS AS BAR  

Partial performance of a contract is an equitable exception to the statute of frauds. See Exxon Corp. v. Breezevale Ltd., 82 S.W.3d 429, 439 (Tex. App.-Dallas 2002, pet. denied); Resendez v. Maloney, No. 01-08-00954-CV, 2010 WL 5395674, at *7 (Tex. App.-Houston [1st Dist.] Dec. 30, 2010, pet. denied) (mem. op.). "Under the partial performance exception to the statute of frauds, contracts that have been partly performed, but do not meet the requirements of the statute of frauds, may be enforced in equity if denial of enforcement would amount to a virtual fraud." Exxon, 82 S.W.3d at 439. Virtual fraud means that due to reliance on a contract, a party has suffered a substantial detriment for which he has no adequate remedy, and the other party would reap an unearned benefit if permitted to invoke the statute of frauds. See id. However, the acts constituting partial performance must be unequivocally referable to the agreement and corroborative of the fact that a contract actually was made, such that they serve no purpose other than to fulfill the particular agreement sought to be enforced. Id. Otherwise, they do not tend to prove the existence of the otherwise unenforceable agreement relied upon by the plaintiff. Id. at 439-40.

SOURCE: HOUSTON COURT OF APPEALS - 01-13-00855-CV – 12/30/2014  

ORAL MODIFICATION OF LOANS UNDER THE STATUTE OF FRAUDS  

See Tex. Bus. & Com. Code Ann. § 26.02(a)(2) (requiring a writing for loan agreements involving loans of $50,000 or more); see also Martins v. BAC Home Loans Servicing, L.P., 722 F.3d 249, 256 (5th Cir. 2013) (holding that the statute of frauds applies to oral modifications to loan agreements).

SOURCE: FIFTH CIRCUIT: Guajardo v. JP Morgan Chase Bank, NA, Court of Appeals, 5th Circuit Jan 12, 2015

STATUTE OF FRAUDS AS AFFIRMATIVE DEFENSE 

The statute of frauds is an affirmative defense, and it is waived if not pled. TEX.R.CIV.P. 94; Phillips v. Phillips, 820 S.W.2d 785, 791 (Tex. 1991).  

Novation defined (2014 Dallas Court of Appeals case)

WHAT IS A NOVATION IN A CONTRACTUAL RELATIONSHIP?

A novation is the substitution of a new agreement in place of an existing agreement between the parties. Goldman v. Olmstead, 414 S.W.3d 346, 358 (Tex. App.-Dallas 2013, pet. denied); In re B.N.L.-B., 375 S.W.3d 557, 562 (Tex. App.-Dallas 2012, no pet.). "A novation occurs if a contract evidences an intention to relinquish and extinguish pre-existing claims and rights of action; in lieu of the old obligation, a party accepts the promise of performance of the new obligation instead of the performance itself." Fulcrum Cent. v. AutoTester, Inc., 102 S.W.3d 274, 277 (Tex. App.-Dallas 2003, no pet).

ELEMENTS OF PROOF FOR NOVATION

To establish a novation, the party must prove: (1) a previous valid obligation; (2) an agreement of the parties to a new contract; (3) the extinguishment of the old contract; and (4) the validity of the new contract. Goldman, 414 S.W.3d at 358. The substitution of a new agreement occurs when a later agreement is so inconsistent with a former agreement that the two cannot subsist together. B.N.L.-B., 375 S.W.3d at 562-63. "In the absence of inconsistent provisions, `a second contract will operate as a novation of a first contract only when the parties to both contracts intend and agree that the obligations of the second shall be substituted for and operate as a discharge of the obligations of the first.'" Fulcrum Cent., 102 S.W.3d at 277. Whether a subsequent agreement works a novation of an earlier agreement is a question of intent. Id. The parties must have clearly intended a novation and a novation is never presumed. White v. Harrison, 390 S.W.3d 666, 675 (Tex. App.-Dallas 2012, no pet.).

SOURCE: DALLAS COURT OF APPEALS - 05-12-01719-CV - 7/30/2014

Contract Modification must also be supported by consideration

Modification of contract terms also requires consideration, just as the original contract

CONTRACT MODIFICATION

"A modification must satisfy the elements of a contract: a meeting of the minds supported by consideration." Hathaway v. Gen. Mills, Inc., 711 S.W.2d 227, 228 (Tex. 1986); see also Walden v. Affiliated Computer Servs., Inc., 97 S.W.3d 303, 314 (Tex. App.-Houston [14th Dist.] 2003, pet. denied).

Consideration is defined as "either a benefit to the promisor or a loss or detriment to the promisee." N. Natural Gas Co. v. Conoco, Inc., 986 S.W.2d 603, 607 (Tex. 1998) (quoting Receiver for Citizen's Nat'l Assurance Co. v. Hatley, 852 S.W.2d 68, 71 (Tex. App.-Austin 1993, no writ)).

SOURCE: HOUSTON COURT OF APPEALS - No. 01-11-00800-CV – 2/28/2013
 

Oral modification of contract or novation barred if original contract falls under the statute of frauds

STATUTE OF FRAUDS CONTINUES TO APPLY IF ORIGINAL CONTRACT WAS SUBJECT TO IT, THUS PRECLUDING VERBAL MODIFICATION OF TERMS 

There can be no oral modification of an agreement that is required to be in writing under the statute of frauds. Columbia/HCA of Houston, Inc. v. Tea Cake French Bakery & Tea Room, 8 S.W.3d 18, 21 (Tex. App.-Houston [14th Dist.] 1999, pet. denied).

SOURCE: CORPUS CHRISTI COURT OF APPEALS - No. 13-11-00229-CV – 1/17/2013

An agreement that cannot be performed within one year of its making falls under the statute of frauds. TEX. BUS. & COM. CODE ANN. § 26.01(a), (b)(6) (West 2009).

Here, the leases that form the basis of XTRA's lawsuit are for thirty-six month terms. They therefore cannot be performed within one year and fall under the statute of frauds. As such, ATC's novation defense, based on an alleged oral modification of the lease terms by an XTRA vice-president, would have failed as a matter of law, so we cannot conclude that ATC was harmed by the exclusion of Alvarez's testimony relevant to the alleged oral modification. See TEX. R. APP. P. 44.1(a); Nissan Motor Co., 145 S.W.3d at 144; see also Columbia/HCA of Houston, Inc., 8 S.W.3d at 21. ATC's second issue is overruled.

What is novation and what are its legal consequences?

NOVATION AS A DEFENSE AGAINST ENFORCEMENT OF THE ORIGINAL CONTRACT

Novation is the substitution of a new agreement between the same parties or the substitution of a new party on an existing agreement. Honeycutt v. Billingsley, 992 S.W.2d 570, 576 (Tex. App.-Houston [1st Dist.] 1999, pet. denied).

Where a novation occurs, only the new agreement may be enforced. Id. To establish a novation, the party raising the defense must prove: (1) the existence of a previous, valid obligation; (2) a mutual agreement of the parties to a new contract; (3) the extinguishment of the old contract; and (4) the validity of the new contract. RM Crowe Prop., 348 S.W.3d at 448 (citing Vickery v. Vickery, 999 S.W.2d 342, 356 (Tex. 1999)).

SOURCE: HOUSTON COURT OF APPEALS - 01-11-01034-CV – 2/21/2013 

CITES FOR NOVATION ELEMENTS FROM OLDER CASES

A novation is:

. . . the substitution of a new agreement between the same parties or the substitution of a new party on an existing agreement. See Hidalgo County v. Pate, 443 S.W.2d 80, 89 (Tex. Civ. App.-Corpus Christi 1969, writ ref'd n.r.e.). Therefore, only the new obligation may be enforced. Priem v. Shires, 697 S.W.2d 860, 864-65 (Tex. App.-Austin 1985, no writ). The elements of novation are: (1) a previous, valid obligation; (2) an agreement of the parties to a new contract; (3) the extinguishment of the old contract; and (4) the validity of the new contract. Mandell v. Hamman Oil [&] Ref. Co., 822 S.W.2d 153, 163 (Tex. App.-Houston [1st Dist.] 1991, writ denied).

Honeycutt v. Billingsley, 992 S.W.2d 570, 576 (Tex. App.-Houston [1st Dist.] 1999, pet. denied).

A novation is the substitution of a new agreement between the same parties or the substitution of a new party on an existing agreement. See Hidalgo County v. Pate, 443 S.W.2d 80, 89 (Tex. Civ.App.-Corpus Christi 1969, writ ref'd n.r.e.). Therefore, only the new obligation may be enforced. Priem v. Shires, 697 S.W.2d 860, 864-65 (Tex.App.-Austin 1985, no writ).

Novation is an affirmative defense. Mandell, 822 S.W.2d at 163. Therefore, the burden of proof "is on the party asserting it." See Starcrest Trust v. Berry, 926 S.W.2d 343, 353 (Tex.App.-Austin 1996, no writ); see also Schwab v. Schlumberger Well Surveying Corp., 145 Tex. 379, 198 S.W.2d 79, 82 (1946).