X. MISCELLANEOUS LENDING TOPICS

    A. Loan Commitments

Under California law, a loan commitment, which is commonly set forth in a commitment letter, is binding on a lender only if the commitment letter contains all of the material terms of the loan and either (i) the lender’s commitment is unconditional or (ii) all of the stated conditions have been satisfied.  Peterson Dev. Co. v. Torrey Pines Bank, 233 Cal. App. 3d 103, 115 (Cal. App. 4th Dist. 1991).  When the commitment letter does not contain all of the material terms, the prospective borrower cannot reasonably rely on the loan commitment, shielding the lender from liability for either a breach of contract or promissory estoppel.  Id.  The required material terms of the loan include the identity of the lender and borrower, the amount of the loan, and the terms for repayment.  Id.  Other core terms, such as the interest rate, collateral, prepayment conditions, loan disbursement procedures and default remedies, may not be required to form a binding commitment.  See Laks v. Coast Fed. Sav. & Loan Assn., 60 Cal. App. 3d 885, 891 (Cal. App. 2d Dist. 1976).  However, the absence of numerous important conditions is persuasive evidence of the conditional nature of a commitment letter.  Id.

     B. Statute of Frauds

California’s version of the statute of frauds is codified in Civil Code section 1624.  Under California law, certain contracts are “invalid, unless they, or some note or memorandum thereof, are in writing and subscribed by the party to be charged or by the party’s agent.”  Cal Civ Code § 1624(a).  The contracts falling within the statute include, inter alia, (i) an agreement that will not be fully performed within one year, (ii) an agreement to loan money or extend credit for non-consumer purposes[1] in an amount greater than $100,000 and (iii) a promise to answer for the debt, default, or miscarriage of another, except in certain instances specified within Civil Code section 2794.

Under Civil Code section 2794, a promise to answer for the debtor, default or miscarriage of another is deemed an original obligation of the promisor and does not need to be in writing in the following instances:

(1) Where the promise is made by one who has received property of another upon an undertaking to apply it pursuant to such promise; or by one who has received a discharge from an obligation in whole or in part, in consideration of such promise;

(2) Where the creditor parts with value, or enters into an obligation, in consideration of the obligation in respect to which the promise is made, in terms or under circumstances such as to render the party making the promise the principal debtor and the person in whose behalf it is made, his surety;

(3) Where the promise, being for an antecedent obligation of another, is made upon the consideration that the party receiving it cancels the antecedent obligation, accepting the new promise as a substitute therefor; or upon the consideration that the party receiving it releases the property of another from a levy, or his person from imprisonment under an execution on a judgment obtained upon the antecedent obligation;

(4) Where the promise is upon a consideration beneficial to the promisor, whether moving from either party to the antecedent obligation, or from another person;

(5) Where a factor undertakes, for a commission, to sell merchandise and act as surety in connection with the sale;

(6) Where the holder of an instrument for the payment of money, upon which a third person is or may become liable to him, transfers it in payment of a precedent debt of his own, or for a new consideration, and in connection with such transfer enters into a promise respecting such instrument.

Cal Civ Code § 2794.

Contracts covered by the statute of frauds cannot be modified or renewed by a subsequent oral agreement.  Secrest v. Security National Mortgage Loan Trust 2002-2, 167 Cal. App. 4th 544, 553 (Cal. App. 4th Dist. 2008) (“An agreement to modify a contract that is subject to the statute of frauds is also subject to the statute of frauds.”).  However, under certain conditions, the doctrine of promissory estoppel can provide an exception to the enforcement of the statute of frauds.  A party to an oral contract that falls within the statute may be estopped from asserting the statute of frauds as a defense to enforcement of the agreement where the other party to the contract partially performed and materially changed position in reliance on the agreement.  Anderson v. Stansbury, 38 Cal. 2d 707, 715 (Cal. 1952) (“Before a party can be estopped to assert the statute due to the other’s part performance, it must appear that a sufficient change of position has occurred so that the application of the statutory bar would result in an unjust and unconscionable loss, amounting in effect to a fraud.”).

[1] Civil Code section 1624(a)(7) provides that an agreement to loan money secured solely by residential property consisting of one to four dwelling units shall be deemed to be for consumer purposes.